Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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........................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ...................................................................................................................................... Gross Product Margin ....................................................................................................................................................................... 44 Figure 21: Gross Marketing Margin Elements .... 43 Figure 20: Ex-Tax Pump Price Elements ................... 66 Figure 35: Saint John NB .............. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)................................................................... 28 Figure 8: Outlet Representation by Service ........................................................................................... 36 Figure 17: Study Market Methodology ................. 56 Figure 30: Regina ................................ 53 Figure 28: Vancouver ......................Price History ......................................................................................................... 57 Figure 31: Winnipeg ........................................................................................................................................................................................................................... Pump Price (nominal ¢/litre)...........................................Price History ..........1988-1995 .............. ex-tax elements ................Regional & Urban Groupings................................................tax....... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category............................................Price History... 69 Figure 36: Halifax .......................... 48 Figure 25: Outlet / Volume Relationship ...........Price History .........Selected Goods & Services ..................................................................................................................... 45 Figure 22: Petroleum Gross Product Margins .................. 40 Figure 18: 1995 Average "Blended" Pump Price ...............................................................Regular Unleaded . 24 Figure 5: Canadian Retail Outlet Population ............... Costs.......................... 30 Figure 10: CPI Index Comparison .......... 34 Figure 15: Monthly Rack Prices: Selected Markets ........Price History.......................................................... 47 Figure 24: Outlet Volume vs................................................................................Price History....................................... 49 Figure 26: Outlet Revenues............. 29 Figure 9: Annual Gasoline Price (Cents per Litre) ..........................................Price History ....... 4 Figure 2: 1996 Average Prices/Margins ........... 62 Figure 33: Ottawa ......................................................................................................... 58 Figure 32: Toronto ............... 70 Figure 37: Charlottetown .......................................... 42 Figure 19: Pump Price .................................................................................................................... 71 MJ ERVIN & ASSOCIATES i ...................................................................Price History.. 33 Figure 13: Monthly Gross Marketing Margins........................................Price History ................................................................................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56............ 24 Figure 6: 1995 Retail Outlets by Province ..................... 25 Figure 7: Outlet Representation by Mode. 50 Figure 27: Victoria ..................... 35 Figure 16: Monthly Demand vs............................................................................................................................................................Price History...List of Figures Figure 1: Pump Price / Margin Model...............................Selected Centres ........ 63 Figure 34: Montreal ............................................ 54 Figure 29: Calgary ...8¢ Pump Price) ...........Price History ................................................................. Income....... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) . 46 Figure 23: Average Annual Throughput per Outlet....

...................... 15 Table 3: Selected Study Markets ..... 13 Table 2: Taxes on Regular Gasoline on December 31.................................................................................................. 1996 ........ 51 MJ ERVIN & ASSOCIATES ii .......................................List of Tables Table 1: Downstream Sales Channels ....................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue........................................

Price competition occurs at three distinct levels in this industry.5 ¢ 0.1 ¢ 5. supplier costs and profitability.4 ¢ 19. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. and a foundation for effective policy development. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. the Canadian retail marketing sector realized an average gross product margin of 3. and ex-tax pump prices. represented by crude.8 ¢ TAX 28.3 ¢ 28. rack. dealer income.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. These prices are determined in a competitive marketplace. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.5 cents per litre on the sale of regular gasoline in a typical major urban market. each with unique MJ ERVIN & ASSOCIATES iii . 1996 Average Prices and Margins . Natural Resources Canada (NRCan). and the Canadian Petroleum Products Institute (CPPI). forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. together with a separate review of the refining sector.2 ¢ 24. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This study.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.

demand and other competitive factors existing at the time. this study focuses on the retail gasoline sector. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. and accordingly. compared to about 22. While each of these marketing channels operates in a competitive environment. Approximately 16. due to its prominence in the public and media domain.000 in 1989. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Dealers have a variety of relationships with their supplier. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. The resultant margins are therefore a reflection of the state of product supply.dynamics. Convenience store. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI).500 retail outlets were in operation in Canada in 1995. and declined by 10 cents per litre measured in constant dollars. are examples of ways in which outlet petroleum sales are augmented by other revenues. nine of the past ten years. and the traditional automotive service bay. car wash. which potentially allow for reduced margins at the gasoline pump. well over half of all outlets in Canada operate as lessees or independents. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. From 1986 to 1995.

rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. From 1991 to 1996. and has been a result of several factors including: • • • improved refinery utilization and efficiency. As a result of these trends. MJ ERVIN & ASSOCIATES v . however. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.The “tax-included” nominal pump price increased over this same period. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. This has both resulted in. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.crude) 5¢ Marketing Margin (retail . as a consequence of refinery plant rationalization (closures) and a modest demand increase. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .

This was integrated with selected NRCan price data. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. With the participation of several CPPI member companies. MJ ERVIN & ASSOCIATES vi . With few exceptions. but also had significantly higher throughputs per outlet.Comparison of Canada. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. were selected for a detailed review of outlet economics. rural markets. although this study provides an independent confirmation of this. to derive 1995 average petroleum gross product margins for each of the 19 markets. several “outside variables” (product taxes. 19 markets representing a broad range of conditions. wholesale product cost and freight charges) were isolated from the pump price. This provided for market-bymarket and regional comparisons of key competitiveness indicators. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. When petroleum gross product margins were compared to their corresponding outlet throughputs. A wide range of petroleum gross product margins were evident. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. That such a relationship should exist was not surprising. and one by one. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput.

962 R2 = 0. of which gross product margin and throughput are only two of several factors. which reflects his investment in the outlet. brand advertising.000 2.000.000. supplier profit: after the above costs are allocated. sales processing. corporate charity. and in major vs. Consequently. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000 6.6624 1.000. These costs would include salaries of marketing representatives and management. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000. head office and regional office overheads. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000..6634Ln(x) + 76.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. an additional goal of this study was to undertake a comparison of outlet profitabilities.000 Volume (litres) 4.000 5. the residual revenue is available as profit to be re-invested into retail operations.• Smaller markets performed as competitively as larger centres. This study showed that an average outlet net revenue in the 19-market study group was about $70. revenues from ancillary operations (eg: convenience store. smaller markets.000. and/or distributed to shareholders. and his personal labour investment. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000.000 3. etc. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. not poor competition.

000 $50. The Canadian retail petroleum products industry. after allowing for estimated dealer profit and supplier overhead. Although an objective measure of competitiveness is elusive. suppliers likely incurred a net loss on outlet operations in 1995.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. respectively. Average Outlet Income (before marketing overhead costs) BC/PR $300.000 vs. 1. at 1995 prices.000) $(350.000 $250. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.$154. distant outlets are clearly higher than those associated with concentrated urban markets.000) $(100. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. and that petroleum sales revenues alone.000 per year. $61. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . Despite this difference.000 $150. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000) $(150. by all objective measures available to this study.000 $100. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000) $(250.000) $(200.market study group. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. for which this study had no specific data.000) $(300. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000 $200.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. were insufficient to cover outlet costs.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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Also. virtually all of the 19 study markets exhibited similar levels of competition. these findings clearly show that pump price increases are ultimately linked not to increased profits. Both the downward trend in margins. Outlet throughput is a key determinant of inter-market pump price differences. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . When these margins were compared to their corresponding outlet throughputs. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. Also. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. despite the predisposition of many observers to use them as such. based upon an assumed posted rack price. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Industry profitability is extremely sensitive to very small changes in pump price. and the associated industry initiatives which are ongoing in nature. had petroleum margins which were commensurate with average outlet throughput for that market. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year.• • • improving production efficiency through refinery plant rationalizations (closures). assuming all other costs were unchanged. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). not excessive profits. regardless of size. this industry sector would have realized profits of unprecedented proportions. if Canadian average pump prices were only one cent higher than they were in 1995. A wide range of petroleum gross product margins were evident within the 19market study group. in the long term these fluctuations are likely more reflective of market restorations. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. 7. Nevertheless. Thus. Thus. but to increases in underlying rack prices. That such a relationship should exist was not surprising. serve as perhaps the most significant indicators of competitiveness in the downstream industry. While these economics might appear to place this industry in a position of poor viability. Thus. 8. crude costs. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. most outlets used in the 19-market study represent major integrated oil companies. Indeed. most markets. When plotted against the margin-volume model. and in turn. although this study provides comprehensive evidence of this.

High distribution costs Smaller markets are generally further removed from their source rack point than larger centres.5 million fewer litres of gasoline than a group A (major centre) station. average pump prices were relatively high.product margins than larger markets. which could actually inhibit competition. more isolated markets are generally higher than in larger centres. thereby improving petroleum volumes and ancillary revenues at the remaining sites. In suggesting this approach however. While competitiveness in most smaller markets was shown to be as active as in larger centres. other factors exist which contribute to relatively high margins and prices. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. The loss of employment represented by a station closure may be of some concern to smaller communities. it would seem that if local government in smaller markets were interested in lowering pump prices. reducing the number of outlets may also reduce the number of competitors. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. the solution would be to encourage some dealers to exit the market. in order to build upon the findings in this study towards a full understanding of the dynamics at work. MJ ERVIN & ASSOCIATES xiii . reduce pump prices. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). • • At first glance. there are three points to consider: • • In very small markets. The costs of most consumer goods in smaller. This created some economic pressure to sell product at a higher pump price. 9. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. A full-serve retail gasoline outlet typically employs 3-5 staff. isolated markets face particular challenges: although found to be highly competitive. poor outlet throughputs were generally the predominant factor. according to the margin-volume model. and this study showed that gasoline prices were no exception. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. Smaller. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. which should.

under the current PEI regulatory structure. is well beyond the scope of this study. car wash. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. has seen a decline in pump prices relative to other Canadian markets. will likely preserve a highly competitive petroleum market. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. and in turn. Convenience store. many national and local environmental regulations exist for good cause. depressed petroleum revenues. possibly to the detriment of the consumer. Retail ancillary operations are a critical element of petroleum price competition. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. that where a healthy competitive climate exists. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). MJ ERVIN & ASSOCIATES xiv . The federal Competition Bureau for example. the Halifax market. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. 11. and the perceived effect on their markets. and the traditional automotive service bay. This competition then. This study proposes rather. sometimes below that of outlet operating costs. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. does not appear to benefit in consumer terms. and as such. characterized by narrow product margins and relatively flat pump prices. The historical record is clear however: since deregulating pump prices. Also. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). is both the cause and consequence of increased activity in ancillary operations. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. is viewed as an agency which exists to the benefit of industry and consumer alike. direct regulatory interventions may have an adverse effect on competitiveness. the degree of price competition in the retail petroleum has in effect. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and likely others in Nova Scotia. As these findings show. are an acceptable limitation on pure competition (Finding 8).10. Charlottetown. as marketers find even more innovative ways to attract market share. as it does in the Canadian petroleum marketing sector.

This should be in the form of a quarterly summary of price trends and related measurements.1. Improve public understanding and awareness of competition in the petroleum marketing sector. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. A regular comprehensive competitiveness evaluation. using Canadian and foreign selected markets. along the lines of the model used in this study. margins and competitiveness factors. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. petroleum marketing competitiveness. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. using Canadian and foreign selected markets. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. not inhibit. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. • • MJ ERVIN & ASSOCIATES xv . and the nature of competitiveness influences. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Develop cooperative industry research into marketing sector competitiveness issues. in a simple format designed for consumers and legislators. 2. Public perception measurement. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. and the converse image held in much of the public domain.

is vital if Canadians are to put in place the structures that truly meet their social and economic needs. consumers. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. MJ ERVIN & ASSOCIATES xvi . using Canadian and foreign selected markets. • * * * Better understanding of this industry. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. and regulators alike.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. and in particular.

.to provide a sound database upon which more effective policy decisions can be made.to determine the key factors which drive competitiveness in specific markets. to name a few. and in comparison to the Canadian national average and nearby USA markets”. and in the process. competitive pressures from US and offshore refiners. Project Objectives The working group established as the primary objective of this study “. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. or even communities within the same region. face a number of challenges: a poor public image. and that issues and challenges be identified so that conclusions and recommendations can be made “. . including a regional.to better understand the competitive opportunities and challenges.. which comprise the “downstream” oil industry. . and Industry Canada was convened to undertake this project. region by region across Canada... This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. or petroleum marketing portion of the study. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.Introduction Background Canada’s petroleum refining and marketing sectors. the Canadian Petroleum Products Institute (CPPI). Specific purposes of this study would be: • • • • “. A working group represented by Natural Resources Canada (NRCan). In 1995. The SCF laid the foundation for supplementary studies. and ..to draw comparisons with nearby USA markets.” MJ ERVIN & ASSOCIATES 1 .... leading to more effective policies and reduced uncertainty for future investment.to analyze the rack to retail market and the market structure for refined petroleum products. and regional differences which face the petroleum products retail industry. and a challenging array of potential environmental initiatives..to help the industry cope and to enhance competitiveness.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made.. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.. and MJ Ervin & Associates was selected to undertake the “rack to retail”.

Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . through a multi-faceted approach. Supporting data to these charts can be found in Appendix II. Ultimately. and the effect of competitiveness on each subsector. and in order to provide insights into the range of competitive dynamics that can exist. The study does provide comparisons with US markets on a national level of detail.The study meets these objectives. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Part C: Historical Trend Analysis provides an overview of prices. presents conclusions and recommendations which arise from the study findings. Findings are stated in bold and are summarized in part E of this report. margins and demand patterns over the past several years. Part D: Selected Market Study presents the findings of a diverse 19-market study. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). or which have a specific meaning in the context of this report. and a foundation for effective policy development. It also relates consumer demand patterns to pump price fluctuations. Specific comparisons of specific Canadian and US consumer markets were not made. due to the considerable data gathering difficulties that such an approach would entail. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. • Part E: Conclusions and Recommendations summarizes the study findings and. Many of the findings in this report are presented in graphical form. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. from which some important findings are made. Unless otherwise stated. in Appendix I. undertaken as part of this project to: • make a more detailed examination of price. it provides a comprehensive tool to understand the dynamics of this vital and complex industry.

Natural Resources Canada. Petro-Canada. chaired the steering committee. assisted in securing the support and participation of member companies in the selected markets phase of the study. including Ultramar Canada. Shell Canada. and provided critical guidance and feedback at several key stages in the process. and their 481 retail associates whose outlet data was used in our analysis. CPPI. Ontario Ministry of Environment and Energy.. The Canadian Petroleum Products Institute. Ministère des ressources naturelles du Québec. Suncor Inc. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. NRCan. through Bob Clapp. MJ ERVIN & ASSOCIATES 3 . for their assistance. • • Several organizations participated in two key review sessions. Imperial Oil Ltd. Suncor Inc. Consumers Association of Canada. and Shell Canada.• Industry Canada. Petro-Canada. Environment Canada. and Industry Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). facilitated some of the data gathering needs of this study. These included: Canadian Tire Petroleum. We gratefully acknowledge these companies.. Finally.. and also participated in the steering committee. through Maureen Monaghan and Huguette Montcalm..

Yet. In fact. unlike many consumer products. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. multifaceted industry. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . And.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. the particular quality of gasoline which is of most interest to consumers is not its colour. texture. or taste. most Canadians relate to this industry in one specific way: as consumers. but simply. as this study shows. It is this particular feature of petroleum products .Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. as they are in Figure 1. and serves to explain several factors that together determine retail gasoline prices at any given time. principally of motor gasoline.price . its price. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. These relationships can be modeled.

This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. Ultimately however. Gross margin is simply the difference between two price points. Before examining each of the model elements. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. an understanding of the term itself is necessary. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. evaluating competitiveness is therefore a partly subjective process. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. is more likely to equate the term with “value for money”. objective measurement for competitiveness. this study examines competitiveness from the latter. (implying that the stated margin represents net income or “profit”). each essentially taking a share1 . consumer perspective. any operating expenses must then be considered before making any determination of profits. MJ ERVIN & ASSOCIATES 5 . and in fact inextricably related. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product).or margin . but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. While this term is often associated with the phrase “profit margin”. Each margin is quantified by its defining prices.from the total pump revenue. it is important to define the term “margin”. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard.Many of the terms introduced and explained in this section are used extensively throughout this study. So defined. A consumer however. While both perspectives are valid. these stakeholder revenues are derived from the revenue from the retail sale. “competitive” may be synonymous with “viable”. gross margin represents revenue only. From an industry perspective. margins are squeezed or expanded accordingly. this study’s use of the term relates to gross margin.

To achieve this. Competition can only be sustained therefore. if market conditions allow a sufficient number of players to remain profitably engaged. Inevitably. the result of price competition is reduced profit. in the sense in which it is something in the public interest. Accordingly. represents a process by which prices are set. the degree of competition within a market. this usually requires a reasonable number of competitors. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. This study therefore attempts simply to identify and illustrate competitiveness indicators which together.Unlike many business or economic concepts. More importantly. improving efficiencies. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. Price competition. as competitors seek to attract market share through lower prices. The actions by business rivals place an upper limit on the prices a firm can charge for its products. reducing costs.” “. Simply put. 1986: “Competition may mean very different things to different people.. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors.” Price Competition in the Oil Industry In order to assess competitiveness. one must ask how marketers compete. provide some means for comparing the type and to some extent. is the only real option in the long term. Conditions for a competitive market can be deemed to exist when: • • more than one. it can frustrate communication and obscure analysis.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. or in other words. Technological change and innovation are the large levers of competition in industry. and ideally many entities offer the same or similar products (brand variety). competitors can either restore higher prices or reduce costs. and the entry of new competitors and new ideas.. Since a competitive market effectively limits the price option. in order to maintain some level of brand variety. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . a universally acceptable definition of competitiveness is elusive. and unless care is taken to use the word precisely. An effective functioning of markets also permits smaller competitors to expand if they meet the test. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May.

so a brief description of these. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. It is also important to stress that the market ultimately sets rack and retail pump prices. The converse notion that the industry establishes a “should be” margin. Jerome McCarthy. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. the “oil industry” consists of two distinct industries: the upstream industry. Given the commodity nature of petroleum products.44 (1st Dec. which in turn defines a proper market price. which in turn defines the margins. competition in the crude and rack markets deserves some mention.. Ill. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. or four P’s: Product. A refiner in Toronto may well compete with a refiner in Buffalo. some organizations have operations in two or more of these markets. is false. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. p.the variables at their disposal. Within the broad context of the oil industry. and Promotion. MJ ERVIN & ASSOCIATES 7 . 1971). whose main activity is the exploration and development of crude oil. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. particularly in the crude (upstream) industry and refiner sector. and are beyond the scope of this study. and are generally known as integrated oil companies. the most effective of these as a competitive tool is price. In fact. (Homewood. Basic Marketing: A Managerial Approach. and as will become more evident in this study. 4th Ed. most Canadians relate more in terms of retail gasoline marketing. Irving. in rack markets. New York. 1960) 2 Although distinct. the raw material from which gasoline is made. Place. Nevertheless. The dynamics of upstream and refiner competition are major studies in themselves. whose main 1 E. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. • Thus described. the geographic scale of competition is an important consideration. commonly known as the “marketing mix”1. and in retail markets. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. and the downstream industry. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners.: Richard D. Price.

It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. our crude prices rise and fall according to price benchmarks established far beyond our own shores. MJ ERVIN & ASSOCIATES 8 . from the exploration for potential crude or gas reserves. its marketing operations). rather than a fixed value. consequently. gasoline grade. Crude oil is a commodity which is traded in a global marketplace. The upstream industry’s crude price is represented in Figure 1 as elastic. production. and the delivery and sale of these products to the consumer. and transportation of crude oil to the refinery plant. Canadian producers must compete to sell their production to refiners. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption.the raw material from which gasoline is made. While this study focuses on the downstream industry (and in particular. which finds and produces crude oil .activity is the refining of crude oil into petroleum products. which it does on a continuous basis. in several commodities trading centres around the world. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. which gives an accurate portrayal of month-to-month crude price fluctuations. as a minor contributor to the world crude supply. Canadian producers are known as “price takers” rather than “price setters” of crude prices. In providing historical comparisons of crude to rack/pump prices. and in the open market structure that exists in Canada. implying that it fluctuates. it is important to examine its relationship with its neighboring downstream industry. Infrastructure The upstream oil industry encompasses a broad range of operations. that is to say. Although this industry is not the focus of this study. Canadian producers have virtually no influence over world crude prices. due to variables such as crude quality. it is probably sufficient to say that. and refinery production methods. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. alongside major producing countries such as Saudi Arabia. drilling. Within the scope of this study.

buy refined products from the refiner and sell them to the end-use customer. or roughly 34 percent of the pump price. and hopefully realize some production. put simply. manufactures a range of refined petroleum products including gasolines. who manufacture petroleum products from crude oil. and lubricants. This sector acquires crude oil.1 cents per litre. diesel. is called the refinery. as a factor of the regular gasoline retail pump price. As a general measure: Finding 2: 1996 average crude price. As is typical of many manufacturing organizations. In addition. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. and some attention to the refiner sector is therefore given here. oil producers must explore for potential reserves. which in oil producing provinces such as Alberta. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. personnel. day-to-day plant operations are cost-intensive. A modern refinery is a sophisticated work of engineering. MJ ERVIN & ASSOCIATES 9 . was 19. From this revenue. maintenance. involving energy. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. The focus of this study is on the marketing sector of the downstream petroleum industry. its predominant feature is the plant facility which. and pay out royalties to the resource owner. in the petroleum sector. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. heating fuels. and from this feedstock.While some suggest that the price of gasoline should rise and fall exactly with the crude price. is the provincial government. and numerous safety and environmental safeguards. and marketers who. crude is only one of several factors that influence pump prices. drill for. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however.

For simplicity. being squeezed or expanded between these two price points. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. less the price at which it bought its raw material2 (rack price minus crude price). this model only uses the benchmark crude value. external measurement of the current market value of a particular petroleum product. as they relate to negotiated. and accordingly. not the refiner sector. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. Although contract and transfer prices are distinct from rack price. which may cause Gross Refiner Margin to be slightly overstated. there would be little or no market-driven competitiveness in the refiner sector. which provides an independent and objective determination of rack-based gross refiner margin. which can be broadly categorized as follows1: • • • rack price . Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. 1 Dealer Price is not included here. For a competitive rack market to exist. 2 MJ ERVIN & ASSOCIATES 10 . the relative competitive strength of any given rack market is difficult to assess. and a return on the considerable capital investment in the plant facility. If for example. refiners sell their product under a variety of arrangements.this is the “internal” price charged by a refiner to the marketing arm of the same company. This margin provides for plant operating costs as described above. Contract and transfer prices are not openly shared. as this price point exists within the marketing sector. some clear competitiveness indicators exist. While refineries are always rack price points. representing major Canadian population centres.Price/Margin Model Elements For simplicity. since the market-driven rack price provides an objective. but with no material effect upon the Gross Product Margin derivation. Wholesale volume data is not readily available on a market-specific basis. indicative of a competitive wholesale rack market. In simple terms. transfer price . the gross refiner margin is elastic. Of these three refiner prices.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. they use rack price as their basis. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. Since both crude and rack prices fluctuate according to market forces.the price charged for immediate supply on an “as available” basis. The existence of rack price in a given market is not of itself. contract price . reflecting the cost of transporting the crude from the producing region to the refinery plant. many of which do not have integral refineries. only rack price information is readily available in the public domain. confidential terms between the seller and specific buyers. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. In fact. the gross refiner margin is the price at which the refiner sells its refined product. On a national basis however. In fact the refiner typically pays a higher price than the benchmark crude price.

The mechanisms that drive rack prices are more fully discussed on page 36. from any one of several regional refiners.for example. but where pipeline or marine fuel terminal facilities exist. 1 Based on Octane Magazine Retail Outlet Survey data. or close to. arises. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. as there is no obvious market mechanism to regulate its setting. to so-called “independent” petroleum marketers. petrochemical producers. would produce better than expected refiner income. integrated refiner-marketers establish transfer prices at. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. due to the relatively small transportation cost. who themselves do not refine petroleum products. or transfer price. the question of the internal selling price. in order to maintain realistic accountabilities within each of the two sub-sectors. market-driven Rack (wholesale) pricing of petroleum products. As shown in Figure 15 (page 35).000 km) for overland truck transport. In practical terms. who compete for a share of this demand. In practice. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. to major industrial consumers. Canadian refiners must therefore be price competitive not only with each other. for example. even overseas. MJ ERVIN & ASSOCIATES 11 . These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. but with their US and European counterparts.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . Integrated Refiner-Marketers In Canada. potential sources of wholesale product supply for most Canadian non-refiner marketers. and in the case of gasoline. and which supply petroleum to about one-third of all retail outlets in Canada1. most refiners also participate in the marketing and retailing of petroleum products. this limits a marketer to a relatively short range (perhaps 1. market-driven rack prices. In these cases of so-called “integrated” refiner-marketers. but at the expense of marketing income. In examining the structure of the Canadian refiner sector. wholesale refined product is bought and sold across very large distances. many US and European refineries are in practice.

Within this industry sector. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. and who essentially deal directly with the refiner. including mining. Wholesale Sales to a wide variety of customers. which “sets” the retail price of gasoline. product is sold from a central facility. home heating. the most recognized element of the downstream oil industry. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. and purchase at or near the established rack price. media and regulatory attention. For this reason. gasoline price and competitiveness issues attract considerable public. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. trucking. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. or in the case of cardlock facilities. as a popular and relevant “window” on the petroleum marketing sector. principally into commercial trucking operators’ vehicles. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. farming. in the minds of many consumers. and aviation. It is this sector which has direct contact with the petroleum consumer and it is this sector. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. each with its own distinct infrastructure. • • MJ ERVIN & ASSOCIATES 12 . Retail Sales to the domestic motorist. Marketing operations within this sector can be broadly classified into three elements.

Sales of petroleum products through bulk sales outlets. Retail outlets are operated in a variety of modes. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. for example. Sales to spot buyers at posted rack price.300 bulk sales outlets in Canada. to the motorist consumer. at a negotiated contract price. using delivery tank trucks.500 retail gasoline outlets in Canada. There are over 850 cardlock outlets in Canada. and usually supply customers by delivery to the customer’s own storage tank. one final element of the pump price model must be reviewed. These outlets usually have considerable inventory capacity. and regular gasoline in particular. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. which is generally less than the rack price. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. according to the contractual relationship between the supplier and the dealer. to the aviation fuel consumer. Sales of home heating fuels to residential furnace oil customers. heating fuel delivery is an integral part of a bulk sales outlet. Sales to non-refiner petroleum marketers. usually involving some aspect of the marketing sector infrastructure. often delivered by pipeline or ship/barge. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Direct sales generally do not involve any marketing sector infrastructure. Before examining this sector in detail. Sales of aviation fuels at major and secondary airports across Canada. in smaller centres. MJ ERVIN & ASSOCIATES 13 . There are over 1. Sales to commercial and industrial accounts by the wholesale marketing sector. which primarily serve long-disttance truckers and commercial delivery and haulage operators. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. In major centres dedicated Home Heat centres provide this service. as principal elements of petroleum marketing operations. such as product transport and/or storage. by delivery tank truck. typically at the “rack point”.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Sales to major industrial accounts. as discussed. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. There are about 16.

The petroleum industry acts as a collector of these taxes. the tax content of retail gasoline in Canada has increased steadily over several years. which amount to 28. If the pump price decreases for example. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. PST). Table 2 shows the provincial tax content for retail gasoline. MJ ERVIN & ASSOCIATES 14 . provincial sales tax. municipal taxes. tax content does fluctuate somewhat with pump price changes. A three-cent drop in pump price. in a small number of markets. typically made up of: • • • • a ten cent per litre federal excise tax. for example. regardless of market conditions. As part C of this study shows.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. stable amount. and seven percent GST.3 in Quebec) drop in the tax content. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. would include a roughly 0.6 cents per litre (Canada 1996 10-city average).2 cent (0. or roughly 50 per cent of the pump price. the tax content of the petroleum price is essentially a pre-determined. 1 Due to the application of GST (and in Quebec.

Table 2: Taxes on Regular Gasoline on December 31.6 3.5 cents and 4.0 10.6 3.0 16.0 10.5 6.5% sales tax applied to the GST-inclusive pump price.0 10.0 14.6 22.7 13.5 3.8 note 1 note 2 An additional tax of 1.0 GST content (7% of pump) 3.5 cents was introduced in the Montreal and surrounding area in 1996.3 Federal Excise Tax 10.5 12.3 10.3 20.0 10.6 3.2 cent per litre pump tax.0 10.0 3.0 10.9 3.0 28.0 4.3 27.7 30.1 32.0 10. An additional pump tax of 1.0 9.5 14.6 25.0 10.0 11.0 10. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.7 18.1 25.4 3.0 15.2 10.0 28.0 27.6 3.5 Total Tax 24. MJ ERVIN & ASSOCIATES 15 .0 10.8 4.0 3.0 cents is charged in the greater Victoria and Vancouver areas respectively. plus a 6.0 10. All Quebec gasoline sales are subject to a 15.0 10.2 24.7 3. Provincial Tax 11.2 24.

4 ¢ 19. and ancillary operations.5 cents per litre (after freight cost). 3. Refiner operations realized 5.2 ¢ 24. and the retail gasoline sub-sector in particular.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. including retail outlet distribution.3 ¢ 28. The residual. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. Figure 2: 1996 Average Prices/Margins . the brand supplier’s costs. and potentially. or 9 percent. based on regular unleaded gasoline.3 percent of the average regular gasoline posted pump price. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). or 50. operating modes. some profit return for the shareholder. This 1 Prices and margins reflect a Canadian 10 city average. to derive a representative value for regular gasoline gross product margin in Canada.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.5 ¢ 0. or 34 percent of the pump price.8 ¢ TAX 28.1 ¢ 5. Upstream operations realized 19.6 cents per litre. was available for product marketing operations.1 cents per litre. MJ ERVIN & ASSOCIATES 16 . namely the dealer’s costs and income. It also provides an overview of the industry in terms of several infrastructure parameters.3 cents per litre.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. this section provides a view of the Canadian petroleum marketing sector.

the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. it falls into the domain of the marketing sector. three key findings can be stated: Finding 4: Finding 5: In 1996. petroleum taxes accounted for 50. As the product leaves the refinery plant. as part C will describe. Freight cost does not typically fluctuate. Although many petroleum marketers conduct their own freight operations. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. The gross marketing margin.3 percent of the average urban price of regular gasoline in Canada. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. is defined by the marketdriven price points of ex-tax pump price. Both refiner and marketing margins have been in decline over the past several years. The marketing sector then. and rack price. and is often out-sourced to third-party common carriers. the finished product (gasoline. In 1996. for example) is sold/transferred at the current rack or transfer price. is the second of two elements of the downstream oil industry. and is then transported to the retail outlet. Based on the 1996 data. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. was 3.3 cents per litre. was 5.5 cents per litre. is usually the gas station. Freight MJ ERVIN & ASSOCIATES 17 . This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. and it is depicted in Figure 1 as a fixed cost element. Bloomberg rack price values were used as the assumed wholesale price. which in the case of retail gasoline.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. this is seen as a “non-core” business. In referring to marketing margins and product margins. In 1996. See page 10 for further explanation. or “rack to retail” margin.

5¢ Product Operations Freight 0. and upstream/refiner margins.3¢ 3. freight. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. and is therefore a poor comparative tool. Figure 3: 1996 Average Regular Gasoline Margins (56.costs are generally less than one-half cent per litre in most major Canadian cities. petroleum marketers. As represented in Figure 3. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). Posted pump price includes all of these variables. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.1¢ Tax 28. as it represents 80% of all retail gasoline sales. as it excludes the “outside variables” of tax. typical of any retail business.8¢ Pump Price) Upstream Operations 19. Unlike most other retail enterprises however.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. storing and dispensing a product such as gasoline adds considerably to the operating cost.5 cents per litre in 1996. but at an average cost of over $200. Gross product margin is therefore defined as gross marketing margin less freight cost.000 per outlet. which are typically close to a wholesale rack point. an average gross product margin for regular gasoline in a major Canadian city was 3. incur a variety of costs.6¢ Refiner Operations 5. together with gas station dealers. rural markets experience higher pump prices than do larger centres. • Product sales: Within this domain. This is a particularly useful measurement in comparing retail gasoline markets.

4th Ed. p. The grade differential varies somewhat from city to city. gasoline). Higher octane grades are more expensive than RUL. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. Place. Basic Marketing: A Managerial Approach. 2 E. Today. • Product In the past decade. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. additives. competitive activity can be observed when a marketer alters one or more of the variables at their disposal..).” or four P’s: Product. marketers compete for the consumer’s choice of transportation energy (for example. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. but most consumers view gasoline as a commodity. expanded product/services offerings such as convenience items. marketers compete to be represented in as many and/or the best locations as possible. Price competition has forced marketers to optimize outlet revenue. Today. it represents a very small percentage of total retail petroleum sales. Jerome McCarthy. competitive strategy of this type focuses heavily on selecting the best place. and 9 cents per litre for premium gasoline.44 (1st Dec. marketers have attempted with some success to differentiate their product offerings from other brands. as gas stations proliferated. Although revenue from this product is factored into the study market economics in Part D. page 24). will ultimately purchase based on price. commonly known as the “marketing mix2. 1960) MJ ERVIN & ASSOCIATES 19 . Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. etc. Place Typically. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. A portion of the market certainly responds to this type of competitive strategy. This study does not examine such a broad issue however.retail gasoline sales respectively1. 1 Diesel is another petroleum product sold at many retail outlets. and the price difference between these grades and the RUL price is referred to as the grade differential. (Homewood. seasonal blends. a number of factors preclude this type of strategy. rather than the most places. Irving. Simply put. propane vs. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. one must ask how marketers compete. 1971). RUL prices are therefore most often cited when relating historical price trends. but in 1995 was typically 5 cents per litre for midgrade. Price. In order to measure competitiveness.: Richard D. and Promotion. Ill. and accordingly. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. or when comparing price levels between markets.

caused by price competition. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. Examples of promotional competition are: • • • brand identity gasoline discount coupon. • • • While examples of all of these indicators are abundantly in evidence. due to the largely commodity nature of petroleum product. and therefore “trades” within a relatively narrow price range. In this context. As such. Promotional activity seems to have decreased in the past few years.contrary to some public perception. and due to the already slim margins available to marketers. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. gasoline is viewed by consumers as a commodity uniform in quality and widely available. Examples are: • prominently displayed prices . Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. their subsector margins. volatile prices . • Price In most markets.• • closure of non-viable outlets. gasoline is a commodity. MJ ERVIN & ASSOCIATES 20 . is less clear. and more importantly. probably due to its relatively high cost. Establishing an objective measurement of price as a competitiveness indicator however. fluctuating pump prices are a significant indicator of robust competition among marketers. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. Promotion In the gasoline retailing sub-sector. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. Consequently. free item with purchase or special price item with purchase. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. low prices and/or margins. price has proven to be the most widely used competitive tool by gasoline marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. At its extreme. This study presents an extensive historical and comparative analysis of pump prices. volatile pricing manifests itself in the form of a price war (see below).that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. uniform prices . this study examines the dynamics of price competition in considerable detail.

This is a misconception. or even undercut the competitor’s lower price. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. While this support may take one of several forms. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. one must adopt the perspectives of both consumers and competing. but to competitors. bypassing the higherpriced outlet. its effect is to restore some measure of the dealer margin. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. Whether through falling pump prices or rising rack prices. facilitated through street price signs. assuming that the rack price is unchanged. Pump prices therefore tend to move uniformly within a very short time. who then react quickly to the change. the effect on many consumers is immediate: they will drive into that station. the relationship between the supplier and dealer is generally as described on page 25. competitors may not follow. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. since they too must restore their gross product margins to sustainable levels. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. for example). competitors will likely match this price.where the ex-tax pump price is equal to. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. When this occurs. are indicators of a competitive market. adjacent dealers. The effect of this upon the gross marketing margin is obvious: it is squeezed. 1 This does not occur at company operated or commission outlets. in order to maintain a reasonable market share. the supplier may temporarily intervene. or even being squeezed to zero . and provide to the dealer what is commonly referred to as price support. In the case of lessee or independent dealers however. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. Finding 7: Price uniformity and price volatility. Price Support In times of “normal” pump prices.When pump prices are uniform. the wholesale rack price. MJ ERVIN & ASSOCIATES 21 . or when prices rise or fall apparently in unison. If one dealer decides to reduce pump prices (by two cents. or even less than. The other dealer has little choice but to quickly match. since there is no “dealer margin”. obviously at the expense of the supplier margin. in an attempt to gain market share. If the posted price increase is too high. To understand the phenomenon of uniform pump prices. Pump price signs are an ubiquitous feature of the retail gasoline industry.

The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. 1997 MJ ERVIN & ASSOCIATES 22 . the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. but reverts back to the dealer when the support arrangement is ceased. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry.Under the provisions of some price support mechanisms. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. or of direct government intervention in marketing. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. More recently. A review of historical retail pump prices in the Halifax. Following a year-long investigation. the Bureau found that there was no evidence to support these allegations1. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. These cases have largely involved local dealers and/or isolated incidents. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. While this study does not intend to undertake a detailed review of the effect of the Act. resulting in 9 convictions. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. An examination of the effect of the Competition Act. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. which is administered by the federal Competition Bureau (Industry Canada). In addition. There are few current examples of direct government intervention in the pricing of petroleum products. the petroleum marketing sector has been the subject of several inquiries at federal. however. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. and a brief discussion of this case appears in part D. is beyond this study’s scope. provincial and even municipal levels. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. control over retail pump price effectively reverts to the supplier. In addition.

Conversely. The high cost of building a modern retail gasoline outlet for example. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. and at least some of this capital cost is regulatory compliance-driven. that is. or inhibiting. promotes or limits market-driven pump prices. it is clear that government policy plays an important role in facilitating.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. and is the single largest market for gasoline products. as outlined above. accounting for roughly 88% of all gasoline demand. Many smaller retail owner-operators. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. These regulations clearly exist to the benefit of all. is in part. creating a need for higher margins. and consequently. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. Retail gasoline sales. a competitive climate. It is important to acknowledge that many regulations affecting the retail gasoline industry. accounts for about 37% of all refined petroleum demand in Canada. one can cite examples of regulatory obstacles to exit from the retail gasoline market. sales of gasoline through the roughly 16. it is the single largest one. So defined. This issue is discussed more fully in part D. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4).500 retail gasoline outlets across Canada. inhibit competition. A practice. accounting for 41% of all petroleum demand. creates an obstacle to. exit from an non-viable market. entry into an attractive market. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. in the form of standards for the decommissioning of retail petroleum sites. particularly in smaller population centres. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. or incentive for. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. MJ ERVIN & ASSOCIATES 23 . higher pump prices. but exist to meet other important societal needs. or incentive for. to some degree. As a product group however. for safety and environmental protection.

2% Propane /Butane 2. Figure 5: Canadian Retail Outlet Population .9% PetroChem Feedstocks 5.9% Diesel Fuel 22.2% Retail Gasoline 37.7% Light/Heavy FuelOils 14.it has no practical means to enumerate each and every outlet.2% Asphalt/Coke 4.3% Total Sales Volume: 84.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. This survey accounts only for major established retail networks .1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . This study provides an estimate of the actual retail outlet population.6% Other Gasoline 4.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.7% Lube/Grease 1.2% Other 0. as shown in Figure 5.

controls the setting of the pump price. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. exist between retail dealers and their suppliers. and all inventory and revenues belong to the supplier. and the dealer. and usually owns the brand name seen at the retail outlet. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. Distribution of these outlets by province (Figure 6. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . who holds initial title to the refined petroleum as it leaves the rack point. or modes. who manages the day-to-day operations at the retail outlet.000 outlets in 1989.The estimated number of retail outlets in Canada has declined from 22. The principal dealer and attendants are salaried employees of the supplier. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The supplier. using Octane counts only) is roughly equivalent to population densities. as one might expect. as owner of the product. and this is of some importance with respect to the matter of prices and competition in this sector.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. the retail outlet is owned and operated entirely by the product supplier. to about 16.500 in 1995. Several possible relationships.

The “dealer” is in essence. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . supplier salary from supplier. Since the supplier owns the petroleum product at this type of outlet. an employee of the supplier supplier supplier typically the dealer. Control of Pump Price Dealer Compensation supplier a commission from the supplier. usually based on cents per litre of petroleum sales.sub-component margins . the outlet facilities and petroleum inventory is owned by the supplier.the entire gross product margin accrues to the brand supplier. The dealer in turn hires attendants. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. the supplier retains control of the retail pump price. and pays them from his commission revenue. but the outlet operator (“dealer”) is compensated by a commission payment. who pays all outlet operating costs. based on pump sales volume. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode.

and in turn resells to the motorist consumer at a higher pump price established by the lessee. The dealer pays most or all of the expenses associated with operating the outlet. This Dealer Price. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. unlike rack or pump prices. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. not the supplier.product from the supplier at a “Dealer Wholesale” price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. MJ ERVIN & ASSOCIATES 27 . can vary considerably from one supplier to another. and sells at the posted pump price. and means of compensation supplier. dealer-established retail price. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and sells at the posted pump price. The margin between these two prices is the dealer’s gross revenue. since it is predicated on contractual arrangements between the dealer and the supplier. the retail facilities are owned by the dealer. less the Dealer (wholesale) Price charged by the brand supplier. The margin between these two prices is the dealer’s gross revenue. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and has control over the retail pump price. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. This dealer margin is defined as the pump price (ex-tax).

This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. who themselves establish pump prices. The remainder represent one of over 50 different marketer organizations. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. or Imperial Oil). Petro-Canada. virtually none of the major integrated outlets are company operated. during a price war) as previously described. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. some general figures are mentioned here. 1 Unless the dealer is under a price support arrangement (for instance. In addition.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. MJ ERVIN & ASSOCIATES 28 . Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. and fully two-thirds operate as lessees or independents. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products.

The proliferation over the past two decades of ancillary services such as convenience stores and car washes. these study findings show that this can vary widely from market to market. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. average annual throughputs ranged from under 1 million litres in smaller population centres. reduced petroleum margins. In effect. Improved outlet revenue from ancillary operations has caused. feature both a large-area convenience food store and a modern car wash facility. Figure 8 depicts the Canadian representation of several key ancillary services. ancillary service has had the consequence of subsidizing the pump price of gasoline. Canadian throughputs have dramatically improved in the past several years . Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . which in part has led to a reduction in retail product margins. These improved outlet throughputs have provided for improved petroleum revenue potential.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. In fact. and is a result of. to over five million litres in major markets such as Toronto. has had a profound effect on the retail gasoline marketing sector.5 million litres.While an average outlet throughput may be in the order of 2. Based on a sampling of outlets surveyed in this study. Many outlets have more than one ancillary offering: many “flagship” outlets for example. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. more fully described in part C. Most ancillary services are operated by the dealer/lessee.

as can be seen in part D of this study. This part examines broad trends in several areas. An “all markets” average. prices are for regular unleaded (RUL) gasoline. including smaller markets. Since rising prices are common to most consumer goods and services. when the Persian Gulf War caused crude prices to increase significantly. many utilize terms which are explained in part A. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. particularly around 1990. an examination of the specific historical record of gasoline prices is useful. using a Canada 10city weighted (by provincial demand) average. As such. would be somewhat higher. Unless noted. MJ ERVIN & ASSOCIATES 30 . Since 1 Data is not regularly collected on smaller markets. and with which the reader should be familiar. While some of the presented findings are selfexplanatory. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. mainly using Canada average values. Regional and market-to-market comparisons are presented in greater detail in part D. the “Canada average” price reflects an average of urban markets only1. This shows that pump prices have increased in nominal terms. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector.

gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). When pump prices are reduced by the amount of tax content. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. nominal pump prices decreased. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. In constant dollars. and relative crude cost. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995.1990. Figure 10: CPI Index Comparison . 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. retail pump prices were about 7 cents less in 1995 than they were in 1986. as in Figure 10. When compared to other consumer goods. ex-tax equivalent prices. MJ ERVIN & ASSOCIATES 31 . rack price. It also depicts the associated margins. as defined in part A of this study. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices.

and the rise in the tax content. which are defined by the price points. nor do rack prices exactly follow crude costs. it simply passes on a fixed cost margin to determine the “correct” pump price. then one might expect margins to be quite constant over time. as might be suggested. If. that is. Figure 12 shows that industry margins have not been constant over time.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. it is also useful to examine the behavior of margins. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. and in fact have displayed a declining trend over the past six years. the downstream industry operates on a “cost-plus” basis. In fact. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. MJ ERVIN & ASSOCIATES 32 . which in turn. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. the presence of these additional market factors have operated to the benefit of consumers. as the next section shows. as shown in Figure 12. Margin History While Figure 11 provides an indication of key price trends. as Figure 11 shows. It is important to state that pump price changes do not occur in exact lock-step with rack prices. and have risen slightly since 1994. due to additional market factors which affect pump and rack prices at any given point in time. are principally a reflection of changes in the underlying price of crude oil.

the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. In particular. not weekly or daily data. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. which have both shown a consistent decline throughout the period 1991 to 1996. this upward trend is not attributable to “downstream” refiner or marketing sector margins. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. as local competitive factors act to self-regulate pump prices. compared to the Canadian average. the actual fluctuation is much more pronounced than shown. since the chart is based on monthly averages. This shows that on a monthly basis. 1 In fact.crude) 5¢ Marketing Margin (retail . several factors.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. and has been a result of. the gross marketing margin can fluctuate quite significantly1. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. The decline in refiner and marketing margins has both resulted in. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . Finding 13: From 1991 to 1996. MJ ERVIN & ASSOCIATES 33 . A more thorough discussion of specific market factors for these and other centres appears in part D.

Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . if not all of the difference in pump prices between Canada and the US. US Price History The retail gasoline tax structure in Canada is vastly different than the US. or even less than. A comparison of Canadian and US regular gasoline pump prices. On an ex-tax basis. is presented in Figure 14. This difference accounts for most. resulting in significantly higher Canadian gasoline prices. Canadian pump prices have been roughly equal to. This shows that.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. although Canadian pump prices in urban markets are clearly higher than in the US. for several years. this is wholly attributable to the difference in taxation. with and without tax. US pump prices.Figure 13: Monthly Gross Marketing Margins.

there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. From this it can be seen that Canadian and US rack prices. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . behave in a very similar fashion. Figure 15 compares these values for selected Canadian and US centres over a period of several years. This would be a useful area for further research. This is no longer the case however. RFG has not been introduced to Canadian markets. page 24) and somewhat increased demand. when compared on an ex-tax basis. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Canadian ex-tax pump prices were historically somewhat higher than in the US. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. • Although this study shows that on an ex-tax basis. Canadian outlet throughputs (although likely still less than those of the US). trading at any given time within a relatively narrow (about 2 cents per litre) range. which is reflected in US average pump prices. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Prior to 1994. both a cause and an effect of improved throughputs and ancillary revenues as previously described. While these trends have also occurred in the US. have improved considerably. as a result of outlet closures (see Figure 5. and moving up or down more or less in unison.

900. albeit less distinct pattern.000 34¢ 2. Yet in the latter half of each year. not only in a given market. or indeed anywhere. conditions begin to favour a “seller’s market”. or sales. As non-refiner marketers attempt to secure a supply of this diminishing inventory.900.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.100. Price History Figure 16 shows the history of Canadian gasoline demand.000 1. and prices tend to fall.700. compared to average ex-tax regular gasoline pump price for the same period. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).000 1. increasing significantly every spring.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. Gasoline price exhibits a similar. but in fact across the North American continent (US demand follows a similar pattern). Pump Price (nominal ¢/litre) 3.000 2.000 2. Figure 16: Monthly Demand vs. of motor gasolines from 1991 to 1996.300.700. and falling in the latter half of each year. the price tends to be bid upwards. a “buyers market” develops.100. Demand vs. rising and falling closely in step with demand.000 2. Gasoline demand exhibits a very regular seasonal pattern.500. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. and as would be expected in any commodities market under these conditions.000 2.000 24¢ 1. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .500. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. as demand ebbs and inventory improves. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. Simply put.

Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. Figure 16 shows that from 1991 to 1995. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market.3%. competing to meet their own needs. a feature of most marketregulated commerce. All of the findings suggest that. demand rose approximately 8. This is of course. despite a rise in demand. while average ex-tax pump price declined by 14% (since 1994. their related product costs and margins. MJ ERVIN & ASSOCIATES 37 . pump prices have increased due to a significant rise in crude costs in this period). which consists of the refiners and marketers of gasoline and other petroleum products. On a long-term basis however. and product taxes which add to the consumer price of gasoline. This part of the study presented a number of historical views of retail gasoline prices. which ensures a competitive product price for buyer and seller alike. has operated in a highly competitive environment. in that prices have fallen. the essence of a free market economy. The traditional supply-demand model predicts that when demand rises. the downstream petroleum industry. as evidenced by declining industry margins. gasoline prices have not followed the traditional model.Whether in the spring or the fall. while world crude prices and Canadian taxes have generally increased over the past several years. so do prices. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike.

outlet volumes. These “outside factors” tend to obscure the more relevant aspect of pump price. outlet costs. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. ancillary revenues. Nineteen markets were therefore adopted for the study (Table 3). namely product margin. and pump prices alone provide very little opportunity for “comparability”. although one was subsequently dropped due to insufficient submitted data.. play a role in a market’s pump price. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. freight. MJ ERVIN & ASSOCIATES 38 . so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and in order to provide insights into the range of competitive dynamics that may exist. etc. there is no regular monitoring of pump prices in smaller centres. A number of factors such as taxes. and a more detailed examination of price. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. is useful in providing broad overviews of industry price and margin trends. • Methodology Selection of Markets A number of markets were selected for the study.

In all. price history data not available through public sources. retail outlet and brand representation. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. To this end. In addition. and for smaller markets. Ontario. and Group B markets less than 500. Suncor Inc. Five companies responded to this request: Imperial Oil.are influenced not by one.Each market was classified according to regional affiliation (BC/Prairie. these organizations provided market-level data on freight costs.000. MJ ERVIN & ASSOCIATES 39 . its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. the gross marketing margin must be examined in isolation from those other variables. retail pump prices . Petro-Canada.0001. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations.. the gross marketing 1 Although White Rock is clearly not a major centre by itself. it was essential to obtain data not normally available through existing public sources. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Furthermore.and consequently competitiveness . and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. To examine the competitiveness of the marketing. and Canadian Tire Petroleum. Process Overview As illustrated in part A. or “rack to retail” sector. Shell Canada. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. 2 Depending upon the outlet mode. but a number of variables.

2. 2 Accordingly. 1995 average values were determined for pump price. The variables of tax content. in addition to operating cost and ancillary revenue data gathered in the study1. The gross product margin thus serves as an interim basis for comparing study markets. and freight. average pump prices are higher than actual average regular gasoline prices. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. as the “blended” price includes other product grades. MJ ERVIN & ASSOCIATES 40 . Where differences in gross product margin might still exist. This allows for an accurate determination of net outlet revenue. For each market. tax content. to derive the 1995 average gross product margin for each of the study markets. From participant company supplied data. rack price. to arrive at “blended” values2. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. Finally. by product grade. a market-by-market profile of outlet income is presented. average outlet annual throughput was determined for each market. rack price. and the final “rationalized” gross product margin was determined for each market. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Using the derived gross product margins and volumes for each market. these were weighted by volume. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. a broad representation of markets was possible. Group B (smaller market) and 19-market study averages. and freight were successively removed from the pump price. weighted by sales demand.margin is stripped of its freight component. 3. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). including some smaller centres. Where applicable. 1 Although outlet cost and ancillary revenue data was not available for all markets.

or consolidated net incomes. the effect on the “blended price” is small.7 million. When these margins are applied to outlet throughputs as in step 4 above. Unlike retail pump prices however. including relatively smaller ones such as Sioux Lookout or Gaspé. product margins. While clear. freight. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. and from one brand to another. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. From participant company data. it is important to understand that the use of rack price in this analysis has certain implications. etc..to determine average consolidated net revenue per outlet. perhaps by 1 to 2 cents per litre. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. also considering that RUL constitutes the majority of product. average revenues from ancillary services were added.. These differentials do vary from one market to another. Wholesale refined product prices used in this study are therefore likely to be overstated. and supplier profit. In referring to marketing margins.. Bloomberg rack price values were used as the assumed wholesale price. Interpretation of Data In some smaller centres. This variation is constant across all nineteen markets however. This value was then applied to the gross product margin to determine average outlet petroleum revenue.. many wholesale petroleum purchases are made at less than the “posted” rack price. and gross product margins are therefore likely to be understated.. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. objective data exist for both of these values. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. Supplier Overhead costs. but they are relatively minor. 5. 6. 7. as described on page 10. . grade differentials were based on known differentials of nearby markets. and accordingly represent a broad spectrum of consumers and marketers.4. accurate comparisons are possible. represent a broad range of markets. A dollar-per-outlet estimate of these elements was made. so that on a cents-per-litre basis. marketing margin. a recognized source of data on world crude oil and petroleum markets and prices. and therefore where assumptions were made. and outlet operating costs were deducted from total revenue. petroleum revenues. encompassing a significant portion of the entire Canadian market. these 19 markets represent a combined population base of 8. The derived weighted average values of pump price. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. MJ ERVIN & ASSOCIATES 41 . Also.

Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. MJ ERVIN & ASSOCIATES 42 .38 cents per litre in ex-tax pump price. The data shows a statistical pump price variance of over 17 cents per litre within this study group. The data also shows that typically. broken into tax and extax components.8 cent difference in pump price 1 See footnote at Appendix II. table J for an explanation of how variance is derived.64 cents per litre in pump price. independently gathered data. there is little to suggest why such a high variance exists. A 6. while lower prices tended to prevail in major centres. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. The first of these variables to be examined is tax. higher priced markets are associated with smaller population centres.Rack prices used in this study are nevertheless market-driven. and based on objective. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. accurate. but a variance of only 12. Tax Figure 19 shows posted pump prices for the study markets. The study data suggests that variations in tax rates account for a significant part of pump price differences. The 19-market study group exhibited a statistical variance1 of 17.

Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. additional elements of the revenue stream must be further isolated.less than one-half cent per litre. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. or when examining historical price trends. The data shows that taxation between markets within the same province varies little.between Calgary and Vancouver for example. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. thus providing a better basis for comparison. but the variance is minimal . As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. was less than three cents. taxes were a significant element of pump price. namely the upstream industry and refiner sector. provincial tax rates can vary greatly. GST content can vary by market. when examined on an ex-tax basis. MJ ERVIN & ASSOCIATES 43 . In all study markets. accounting for roughly half of the average retail price. Figure 19: Pump Price . while taxation between provinces is more pronounced . This eliminates any effect that tax variability may have.75 cents per litre (Vancouver. 1 Due to pump price differences. it is therefore more useful to use ex-tax pump prices when comparing any two markets.while all markets are subject to the same rate of federal excise tax and GST1. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. Montreal).tax. as described in part A.

if a clear understanding is to be achieved. This is due to the fact that for any market. Freight costs are additional. and their respective margins. differ little from those of major centres. To address this. When rack price is deducted from the ex-tax pump price. are clearly delineated by market-driven crude. reflecting the reality that at the rack level of competition. the rack price is equivalent to the upstream margin plus the refiner’s margin. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. rack and pump prices. in the case of Thompson). one region cannot maintain rack prices at a higher level than another. MJ ERVIN & ASSOCIATES Cents per litre 44 . Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. reflecting some differences in refinery crude acquisition costs. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. but ultimately. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. it should be restated that each of these sectors. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. as this would cause rack buyers to bring product in from the lower-priced region . and therefore are best analyzed separately. Furthermore. the rack price is set at the rack point (Winnipeg. the validity of analyzing gross marketing margins in isolation might be raised. as is examined below.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining.assuming transport costs did not outweigh the price difference. rack price) and gross marketing margin elements.

and therefore a significant pump price factor. For markets which are also established as rack points. generally smaller markets. Before using this as an analytical tool however. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. Although freight operations are often an integral part of many petroleum marketing operations.16 cents per litre (gross marketing margin) to 7. the data shows that freight is often a significant part of the gross marketing margin. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. To provide a comparative view of the marketing dynamics within the study group.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector.3 cents per litre. MJ ERVIN & ASSOCIATES 45 . most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. it is essentially a “non-core” business. this freight cost is almost negligible. resulting in comparative gross product margins. one final outside variable must be isolated: that of product freight. For other. in fact. as low as 0. remote population centres. with their component freight costs. Figure 21 shows a study market comparison of gross marketing margins.49 cents per litre (gross product margin). it is therefore important to eliminate the freight variable from the gross marketing margin. Two of the study markets had freight costs in excess of 3. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. particularly in comparisons of major urban markets to small.0 cents per litre.

was the lowest. Bloomberg rack price values were used as the assumed wholesale price. or between any two regions. Gaspé. to the resultant retail gross product margin . or consolidated net incomes. A 7.5 cents).68 cents per litre1. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. For all study markets. at 3. Group A (larger population) markets averaged 5. product margins.5 cents per litre average Gross Product Margin cited in Part B.22 cents per litre Smaller markets showed a wider variance in gross product margin .5 cent variance in gross product margin is still significant however. was the highest of the study group. petroleum revenues.95 cents per litre.06 cents per litre.the gross revenue available to the petroleum marketing sector for its operations. while Group B markets averaged 7. while Toronto.a variance of only 2.5 cent per litre average relates to regular gasoline in major markets.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.17 cents per litre.42 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets . Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. at 14.6 cents) to the variance in their component gross product margins (7.68 cents per litre. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. 1995 gross product margin averaged 5. In referring to marketing margins.6. as the 3. MJ ERVIN & ASSOCIATES 46 . whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.

To understand why such a wide range of margins can exist after eliminating all tax and freight variables. it would likely be so unprofitable as to be un-viable.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. once isolating retail gross product margin from all of the “outside” pump price factors. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. ranging from under 700. A wide range of volume performance is evident. Figure 23: Average Annual Throughput per Outlet 6. 3.2 cents per litre in Gaspé. vs.000 litres per year (Toronto). if any retail gasoline outlet located in the Toronto area for example.000 litres per year (Sioux Lookout) to over 5. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. an examination of related outlet throughput volumes is necessary.000.000.000.000 4. If these two factors are related to each other as they are in Figure 24.000.1 cents per litre in Toronto.000 Litres 3. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000.differences between markets.000 5. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000.14. sold significantly less than 5 million litres of petroleum per year. Indeed. for example.000.000 2.000 1. a wide range of variability still exists between markets in the study group .

On average however. If all outlets in a given market experience generally low throughputs. Ontario.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.that is. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000.42 cents) than smaller (Group B) population centres (7.95 cents). and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. As most outlet operating cost are fixed in nature .7 million respectively.000 6. it follows that higher gross product margins will be the consequence.000. Although MJ ERVIN & ASSOCIATES 48 . Smaller markets perform as competitively as larger centres.4 million litres annually.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000. Regionally.000 Volume (litres) 4. compared to 2. With few exceptions.000 2.6634Ln(x) + 76. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.000. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. the Group A market outlets had roughly 50% more throughput than Group B outlets .962 R2 = 0. while those with high Gross Product Margins tend to have low outlet throughputs.000.000. not of poor competition.000 3.6624 1.000 5. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.Figure 24: Outlet Volume vs. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. all market groups (BC/Prairie. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. they remain essentially the same regardless of volume changes .

Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). It represents the residual revenue which is available to the dealer and to the supplier.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. two additional factors are introduced: ancillary revenue and outlet operating costs.000.000. Figure 25: Outlet / Volume Relationship . and incur many expenses in the course of their commerce. In reality. as described below. less outlet costs. competitiveness occurs between retail outlets.the revenue available for dealer income. is only a measure of petroleum revenue per litre.000. Consolidated Net Revenue per Outlet To create a complete.000 6.000 2. These additional factors clearly have an effect on the relative competitiveness of retail markets. and auto service. however. which for the study group. supplier overhead costs. ancillary sales.000. and supplier MJ ERVIN & ASSOCIATES 49 . Gross product margin. which. and the resultant consolidated net revenue.716 . and ultimately shows that very little difference in competitiveness exists between any two markets. and must be examined. supplement their incomes with other revenues.000 3.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. in addition to petroleum sales.000 5. such as convenience stores. Figure 26 summarizes total outlet petroleum sales. averaged $69. car wash. this is likely due to the higher incidence of Group B study markets within this region. while operating costs are those costs which are directly incurred in the operation of the retail facility.000 4.000. Ancillary revenues are those derived from non-petroleum sales sources.000. product cost. outlet-based view of retail markets.

000) $(300. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . A discussion of the ultimate distribution of this revenue is useful.000 per year respectively . As described above. Finding 19: Based on published rack prices.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000 $200.Group B outlets were not as profitable as these revenue values might suggest.profits. MJ ERVIN & ASSOCIATES 50 .000 $250.000) $(100. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. In effect.000) $(200. Income BC/PR $300.000) $(350. as explained below. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. these ancillary operations contributed to a lower product margin and consequently. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 $50. Costs. An examination of these component elements reveals a significant finding: that for most markets.$154.000 $100. Table K).000 $150. causing the weighted average for Quebec / Atlantic to be depressed). Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 vs. which reflects his investment in the outlet. $60. and his personal labour investment.000) $(250. reduced pump prices.000) $(150.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. Figure 26: Outlet Revenues. Most markets showed relatively similar net revenues (see Appendix II.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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The somewhat high margin placed this market slightly above. but well within a cluster of markets with similar throughputs. Vancouver provides several perspectives into retail marketing. net outlet revenues were less than those of other major centres. while average throughput ranked 4th.000 1. this market has access to numerous refiners along the Pacific coast through marine supply.98 ¢ 0. ranking 11th.745 18 446 2. contributing to a higher than average pump price.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.542. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. and also has local refining capacity.38 ¢ 7.968 litres 7. as described below. Geographic / Supply / Freight cost considerations: As a port city.Vancouver population # of brands # of outlets outlets per 10. Figure 28: Vancouver . Vancouver collects a 4 cent per litre municipal tax.000 barrel per day plant located in the greater Vancouver area.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Overall. and with access to wholesale product by several means.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Low consolidated net revenues may have contributed to the higher margin.ex tax Canada Average . Vancouver is also a terminal for a refined products pipeline from Edmonton.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . Influence of other markets: Although relatively close to the US border.658. a 60. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. This may explain the somewhat elevated gross product margin in this market.

45 ¢ 7.000 16. prices in this market have historically mirrored those of Vancouver.630 litres 7. prices. the study data found little to suggest a material effect upon representation. Average outlet throughputs were relatively high. and retail gross product margin was less than that of markets with a similar population base. This market is close to its usual rack point. Influence of other markets: Although this market is a border-crossing community.604.White Rock population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations:. or competitive dynamics. Like Vancouver.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. due to its proximity to one. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. but less than most markets with a small population base. MJ ERVIN & ASSOCIATES 55 . price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. gasoline “cross-border shopping” is less pronounced than might be expected. the White Rock retail gasoline market displayed the same attributes as a major urban market. Despite its relatively small size.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Price history / Taxation: Although no specific data is available.98 ¢ 0. thus providing some unique characteristics for the market study. adjacent to the United States border. White Rock’s margin was typical of markets with similar outlet throughputs. White Rock is essentially part of a major market due to its proximity to Vancouver. this market is subject to a 4 cent per litre municipal tax. at least in this market. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Vancouver. This is likely due to the fact that unlike many smaller markets.315 4 8 4. In all respects. This suggests that. Freight costs were accordingly low compared to other small markets in this study.

creating some competitive pressures (see Nanton).extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .719 litres 6. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis.47 ¢ 0.Calgary population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Calgary had the third highest number of retail brands.000 710. which was one reason for selecting Calgary as a study market.24 ¢ 6. Product is usually sourced from Edmonton refineries via pipeline. Rack-to-outlet freight costs are among the lowest in the study group.675 27 313 4. Influence of other markets: Calgary is fairly remote from US and other major markets. Calgary is of sufficient size to support a viable rack market. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Figure 29: Calgary . Consolidated net revenue: was typical of other major markets in the study group.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Calgary pump prices are very close to the Canadian average.827.ex tax Canada Average . pump prices in this market have historically been well below the Canadian 10-city average. Some smaller markets in the vicinity have occasionally priced below Calgary. Other considerations: Of the markets studied.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Indeed. Price history / Taxation: As the figure below shows. indicative of a strong competitive climate.

extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Although no supporting data is available. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Since then.794 litres 7.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . This is partly due to provincial taxation levels.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. it is likely that this reflected a surplus of wholesale inventory within the local market or region. which are among the highest in Canada.50 ¢ 0. price volatility has eased. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Since 1993. Figure 30: Regina . Ex-tax prices are also above average.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. and therefore experiences no particular influences from any other major market. and is therefore a recognized rack pricing point. margins and throughputs were typical of other markets with a similar population base.180 15 86 4. Influence of other markets: Like Calgary.21 ¢ 7. supply/demand is likely more balanced. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.000 179.ex tax Canada Average .089. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. this market is removed from other significant markets.Regina population # of brands # of outlets outlets per 10. Consolidated net revenue: was typical of other similar markets. Regina was of some interest as a study market. and a history of volatile pump prices. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. and this market is now more typical of other large population centres.

Consolidated net revenue: No ancillary or outlet cost data was available for this market. Since then.790 17 261 4.265.217 litres 8.000 616. this market is removed from other significant markets.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. this market has exhibited relatively stable pricing. prices have tended to stay somewhat above the Canadian average. like most markets of this population density. Figure 31: Winnipeg .ex tax Canada Average .23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. On an ex-tax basis. possibly due to modest ancillary revenue.06 ¢ 0. Influence of other markets: Like Calgary. it is an established rack price point. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. and has remained very close to the Canadian 10-city average.22 ¢ 7. although there is no study data to support this. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . though somewhat higher than average ex-tax pump prices.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . probably related to a regional surplus of wholesale inventory (see Regina). This may reflect a lower than average Consolidated Net Income.Winnipeg population # of brands # of outlets outlets per 10. Price history / Taxation: In the early 1990’s this market experienced some price war activity. although. and therefore experiences no particular influences from any other major market.

Nanton had the second lowest gross product margin of the study group. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume.071. MJ ERVIN & ASSOCIATES 59 . in order to maintain a share of the considerable potential sales revenue that passes through this market. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack.585 4 5 31.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Alberta population # of brands # of outlets outlets per 10. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Consolidated net revenue: No Ancillary or cost data was available. would have an offsetting effect. Despite its small size.far in excess of what would be expected of a community with a population of 1. the Nanton retail gasoline market displayed the same price attributes as a major urban market. in terms of expected petroleum revenues. placing Nanton well below the expected margin.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. this market has a relatively low freight overhead. more isolated small-town markets.000 1. Price history / Taxation: In order to attract market share beyond simply the local population. it is likely that low operating costs. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Unlike many of the smaller markets in this study group. the retail gasoline market in Nanton was not restricted to the local population. Nanton appeared to benchmark its pump prices to those of Calgary. due to its proximity to one.Nanton. Nanton has traditionally priced either at or below Calgary. Average outlet throughputs were relatively low. Nanton had a high number of per capita outlets . While these conditions would normally result in a high gross product margin. Nanton was the smallest market in terms of population.the highest of the entire group . although not as low as expected. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Nanton was perhaps the least viable market in the study group.91 ¢ 0. Influence of other markets:. In this respect. and perhaps healthy ancillary sales associated with highway traffic. Due to its highway location and its proximity to Calgary. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. situated on a major North-South highway to the United States Among the study group.600. a feature not available to other.000 litres 5.41 ¢ 5. as Figure 24 shows. while others experience consistently high prices.and a low average outlet throughput.

715 6 8 11. isolated markets. nor is it influenced by. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. its normal rack point. this market has little or no influence upon. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.000 6.6 cents per litre.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. Alberta population # of brands # of outlets outlets per 10. and was accordingly chosen as a study market. isolated markets.Peace River. In contrast to Nanton. Peace River also experiences high freight costs. though fairly typical of many smaller. further adding to overall high pump prices. Peace River has among the highest freight cost in the study group. and in fact fell into a tight cluster of four other study markets. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.623 litres 12. experiencing relatively high gross product margin and consequently. Supply is via tanker truck from Edmonton. MJ ERVIN & ASSOCIATES 60 . and due to its isolated locale in northern Alberta. they were comparable to other markets with similar average throughputs. other markets. Geographic / Supply / Freight cost considerations: At 1.6 ¢ 10.45 ¢ 1. Price history / Taxation: Peace River is typical of small. high pump prices.157.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.

other markets.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. thereby creating the potential for narrower margins. Thompson is faced with the dilemma. Geographic / Supply / Freight cost considerations: At 3. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential.000 14. Although ancillary revenues were the smallest of the study group. MJ ERVIN & ASSOCIATES 61 . and reduced pump prices. Influence of other markets: Since is not located on a major inter-uban thoroughfare. Supply is via tanker truck from Winnipeg. isolated markets. further adding to overall high pump prices. Although outlets in Thompson appear to be as competitive as those of any other study market. Price history / Taxation: Thompson was typical of small. the community of Thompson clearly falls into the category of a small. It also experienced high freight costs. Thompson is among the highest freight costs in the study group. and due to its isolated locale in northern Manitoba. nor is it influenced by.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. its usual rack point. resulting in per-outlet petroleum revenues which were quite typical of many markets.975 5 6 4. These factors resulted in relatively strong per-outlet net revenues.02 cents per litre. Other considerations: Like other small markets. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. this market has little or no influence upon. a significant portion of which would likely be distributed towards supplier overhead costs. Manitoba population # of brands # of outlets outlets per 10.1 ¢ 3. experiencing relatively high gross product margin and consequently. high pump prices. This however.Thompson.014.02 ¢ 11. they were comparable to other markets with similar average throughputs. outlet costs were also modest typical of most smaller markets.520 litres 14. Consolidated net revenue: Low outlet throughputs were offset by higher margins. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. and in fact fell into a tight cluster of four other study markets. remote market.

it had the second highest brand variety of the study group.3 ¢ 3. similar to that of Montreal.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . as evidenced by an exceptionally low gross product margin. Figure 32: Toronto .098. In addition. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity.275. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. and is also relatively close to wholesale supply sources in the US. Influence of other markets: This market is continuously linked with several other major retail markets. stretching from Pickering to Buffalo.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. This is likely offset by high operating costs. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. this market was consistently less than the 10-city average. New York. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. and a resultant low consolidated net revenue.36 ¢ 0.Toronto population # of brands # of outlets outlets per 10.000 2. and first in average throughput per outlet.extax Toronto Posted Price . thus there exists a climate of robust competition. this market ranked first in a number of measures: lowest gross product margin.478 litres 3. least number of outlets per capita. With an average “blended” gross product margin of only 3. Consolidated net revenue: Although no study data was available for this market. it is likely that outlet ancillary revenues are among the highest in the country.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. Within this region are thousands of retail outlets.775 30 546 2. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. On an ex-tax basis however.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .06 cents per litre. It consequently has a low freight component.

margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.948 litres 5. Other considerations: While pump prices in this market were somewhat higher than in Toronto. rural markets co-exist in this area. some of which have on occasion priced below Ottawa (see Nanton and Calgary).extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Although petroleum revenues were typical of major markets. Consolidated net revenue: was low.145 19 209 3. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. ancillary revenue was slightly lower than average. freight costs within this market were quite low.97 ¢ 0. in fact.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. and close to the Canadian 10-city average.ex tax Canada Average .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.004. slightly lower that expected. Influence of other markets: Although Ottawa is the only major market in the immediate area.000 678. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics.29 ¢ 5. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. Figure 33: Ottawa . exhibiting all of the characteristics of robust competition. several smaller.Ottawa population # of brands # of outlets outlets per 10. and operating costs were higher than most.

465. Pump prices in this market were thus typical of any market with similar throughput characteristics. MJ ERVIN & ASSOCIATES 64 . Sault Ste Marie is a sizable market. partly due to higher freight costs.Sault Ste Marie population # of brands # of outlets outlets per 10. a product of relatively strong net petroleum revenues combined with lower than average operating costs.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. and accordingly. somewhat isolated. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. This would suggest that a significant market share is being lost across the US border. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. this Canadian market has some difficulty in remaining both competitive and viable. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Freight costs are therefore high. and between 5 to 8 cent per litre in gross product margin. Influence of other markets: This market is close to a US border market. a consequence of the transport distance from the rack point. average throughputs were modest. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). yet with some potential for cross-border retail competition.22 ¢ 7.000 81.73 ¢ 1.475 10 24 2.550 litres 8.

This is a major factor in the high cost of gasoline in this market. in fact the second highest in the study group. and outlet throughputs of any market studied. largely due to higher freight costs.Sioux Lookout population # of brands # of outlets outlets per 10. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Freight costs are therefore high.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.2 ¢ 11. with little or no influence from other retail gasoline markets. one-seventh the average throughput in Toronto. Consolidated net revenue: No data was available for this market. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. It therefore presents some unique characteristics for the market study. Influence of other markets: This is clearly an isolated market. and had the least number of outlets. Sioux Lookout is well-removed from any major highway. An average outlet in Sioux Lookout pumped only 694.066 litres 14. This would suggest that. this market experiences a high degree of price competition.000 3.310 3 3 9. although high. so that virtually all sales volume represents local demand only. brands.006 litres in 1995. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. was much less than expected for a market of this size. MJ ERVIN & ASSOCIATES 65 .06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. despite its high prices.96 ¢ 3.

000 1. Montreal was included in the selected market study. This.3 ¢ 5.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. With 32 competing brands. Figure 34: Montreal .394. placed Montreal lowest of all study markets in terms of consolidated net revenue. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. pump prices in Montreal have generally been at or below the 10-city average for major markets.144 litres 5. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. a function of a competitive rack market and an excess of retail outlets competing for market share. It therefore represents a highly competitive rack market.43 ¢ 0.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . pump prices in this market have a tendency to be volatile. Price history / Taxation: As the figure shows.Montreal population # of brands # of outlets outlets per 10. and is also relatively close to wholesale supply sources in the US.870 32 866 4.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . combined with low petroleum revenues and high operating costs. thus promoting a competitive climate.extax Montreal Posted Price . with resultant low average outlet throughputs. this market ranks first of the study group in terms of brand variety. On an ex-tax basis however. Influence of other markets: Like Toronto. this market interacts with several other markets in the region. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average.5 cents per litre was introduced into the Montreal area).775. an additional tax of 1. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.

Nevertheless.Chicoutimi population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): Outlet throughputs. Gross product margin was accordingly high. within a cluster of other markets with similar attributes. Consolidated net revenue: was average among the study group.289 litres 12.08 ¢ 11. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.250. although low. both pump and ex-tax prices in this market were higher than average.000 120. In the case of Chicoutimi. this market has little potential as a rack market. for example).04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.75 cents per litre. but as the figure shows. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. this amounted to a reduction of 5.28 ¢ 1. Freight costs are therefore somewhat high. yet is geographically quite isolated. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. Chicoutimi is normally supplied from the Quebec city rack. MJ ERVIN & ASSOCIATES 67 .605 14 97 8. by tank truck. a partial factor in the high cost of gasoline in this market. were quite typical of markets with similar populations. but is quite isolated from any other markets.

This is a major factor in the high cost of gasoline in this market. Although operating costs are likely to be low in a small market like Gaspé.50 ¢ 3.17 gross product margin the highest of the study group. this margin was only slightly higher than expected for a market with these throughput attributes. ancillary revenues would likely be modest.400 6 13 4. in fact the highest in the study group. located at a considerable distance from its rack source of supply. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. by tank truck.900 litres 17. Nevertheless. with little or no influence from other retail gasoline markets. Consolidated net revenue: No data was available for this market.000 16. Influence of other markets: This is clearly an isolated market. Freight costs are therefore high. a key factor contributing to its 14.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Gaspé is well-removed from any major highway.33 ¢ 14. both pump and extax prices in this market were higher than average.75 cents per litre. a product of high freight costs and gross product margins. MJ ERVIN & ASSOCIATES 68 . amounting to a reduction of 5. Nevertheless. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. so that virtually all sales volume represents local demand only.Gaspé population # of brands # of outlets outlets per 10. in the case.

ex-tax prices were relatively high.970 9 56 7. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. it is an established rack point. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. Consolidated net revenue: was average for the study group. and therefore. reflected in the high ex-tax pump price. freight costs in this market are low. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price .27 ¢ 9. and is capable of shipping and receiving wholesale product through marine facilities.694 litres 9. Saint John presents some unique characteristics for the market study. Average gross product margin was consequently high. Accordingly. resulting in lower than expected average outlet throughputs. Nevertheless. That a major refinery resides in this market might suggest that these prices should be among the least in the country.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. which for Saint John.79 ¢ 0. retail pump prices are ultimately a reflection of rack prices. with or without a local refinery.Saint John NB population # of brands # of outlets outlets per 10.ex tax Canada Average . do not differ markedly from any other rack point in the study group. this market fell within the expected range of gross product margins as a function of outlet throughput.extax MJ ERVIN & ASSOCIATES 69 .095. Price history / Taxation: Historically. the Saint John retail market is relatively isolated from other retail markets of any significance. In fact. Since provincial taxes are among the lowest in the country. posted pump prices in the Saint John market have closely followed the 10-city average. Figure 35: Saint John NB .000 74.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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. while those with high Gross Product Margins tend to have low outlet throughputs.. these ancillary operations contributed to a lower product margin and consequently........... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences................ 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels......................................... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre................... ..... when compared on an ex-tax basis..Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products......................... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads............................................... 33 Finding 13: From 1991 to 1996............ given the possibility of discounts from posted rack prices and potentially lower overhead costs... particularly in comparisons of major urban markets to small.......... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. 48 Finding 19: Based on published rack prices............ which in turn........................... . residuals for outlets not studied may be better........... the residual represented a net loss to the supplier.. ... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness............ which ensures a competitive product price for buyer and seller alike............ 50 Finding 20: For the 481 individual outlets studied......... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.................... remote population centres................... ...... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied................... ...... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.................. a feature of most market-regulated commerce..... reduced pump prices........ The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations..................... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.........51 Finding 21: Based on published rack prices and the individual outlet data............................................. ................. are principally a reflection of changes in the underlying price of crude oil.................................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better........................... In effect...................... and likely a negative impact on consumers............................. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.......... the profitability of the 481 outlets studied appears only marginal......................... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US............. 71 MJ ERVIN & ASSOCIATES 73 ..........................

each with unique dynamics. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). This has not simply been a result of a decline in underlying raw materials costs. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. over the long term. Virtually all of the competitiveness indicators examined in this study relate to price. by all objective measures available to this study. The Canadian retail petroleum products industry. As described in this study however. was shown to be strongly competitive: • A long-term decline in pump prices. The resultant margins. The study presents such a model. the very margins within which this industry operates has. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. exhibited a diminishing trend (Finding 13). In comparing several diverse markets. On a national level. is mistaken. Although an objective measure of competitiveness is elusive. Rack and pump prices are determined in competitive marketplaces. 2. Canadian prices have been at or below US prices in recent years. when taxes were excluded (Finding 14).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. was observed (Finding 10). 1. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). when measured in constant and nominal dollars. place. in comparing Canada average (city) pump prices to those of the United States. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. and promotions are the other three). price is but one of four competitiveness “tools” available to marketers (product.

This would entail the tracking of not only pump price. an exercise that consumers are unlikely to engage in. since this is the effective range of consumer choice. Due to the localized nature of competition in the retail gasoline marketing sector. but even in such cases. In applying such a model to the retail petroleum marketing industry. for example) were rationalized. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4).3 cents or 9 percent (Finding 5). and in some markets. particularly smaller ones. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. well over half of all outlets in Canada operate as lessees or independents. but also rack prices and outlet performance. refiner margins accounted for 5. Petroleum product taxes are levied at the federal. MJ ERVIN & ASSOCIATES 75 . 3. Dealers were shown to have a variety of relationships with their supplier. and product margins accounted for 3. when the “outside” factors (tax. generally do not serve as competitiveness inhibitors. taxation as an element of public policy is an area worthy of additional research. The demonstrated exception to this is in markets directly adjacent to nearby US markets. rack price and freight cost. crude costs accounted for roughly 34 percent (Finding 2). experienced higher than average pump prices.even negative values. and accordingly.5 cents. measured against the average outlet throughput for that market. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. or 6 percent (Finding 6) of the 1996 average regular pump price. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. municipal levels of government. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). these markets have managed to sustain a certain level of viability and competitiveness. vary considerably from one population centre to another. provincial. it is important to understand that. While some markets. but given its magnitude. taxation differences between Canadian and US markets. presents a competitive disadvantage to Canadian marketers. and in some markets. or even between Canadian markets with differing tax structures. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. This implies that the competitive dynamics pertaining to these retail markets can. retail petroleum markets are considered local (municipal) in scope. The latter two can vary considerably from one market to another. Taxation is a significant factor in the price of retail gasoline. are thus a reflection of the state of product supply. By contrast. and are a predominant cause of inter-regional pump price differences (Finding 16). and do. demand and other competitive factors existing at the time.

the Canadian retail marketing sector realized an average gross margin of 3. when examined on the margin-volume model. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. on the basis of price fluctuation alone. Viewed from this perspective. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). the absence of price war activity does not imply a lack of competitiveness. 5. which in turn. Retail pump price changes showed a close relationship to underlying rack prices. on a per litre basis. is available to provide for all retail marketing operations including outlet costs. Pump price fluctuations can be an indicator of competition in the marketplace. which represent the majority of Canada’s population base. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. constitute a small portion of the retail pump price. incorporated with ancillary revenues and outlet costs. Rack prices were shown to not significantly differ between major centres. Demand for gasoline was shown to vary significantly according to the time of year. and a loss in the case of urban markets. supplier costs and profitability. exhibited competitive traits typical of any of the study markets. MJ ERVIN & ASSOCIATES 76 . This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. and more price-stable markets such as Sioux Lookout. The pump price/margin model shows that in 1996. fluctuating prices are a strong competitiveness indicator (Finding 7). Retail gasoline marketing revenues. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. showed a close relationship to underlying crude prices (Finding 11). 4. predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). dealer income. This margin represents gross revenue (after wholesale product and freight cost) which. second only to the United States. In fact. This consolidated outlet revenue. which in turn is the principal driver of ex-tax pump prices. reflecting consumer demand behavior (Finding 15). Sioux Lookout. when distributed these three ways (Finding 20). translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. While price wars are undoubtedly an indicator of competitiveness. in a highly distinct. a price-stable market.

intense competitive pressures in the downstream industry in general. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). MJ ERVIN & ASSOCIATES 77 . both of which are beyond the direct influence of Canada’s oil companies. and the associated industry initiatives which are ongoing in nature. this industry sector would have realized profits of unprecedented proportions. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. Also. and the marketing sector in particular. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. Since 1991. have caused. despite increases in tax content and crude costs (Finding 12). in the long term these fluctuations are likely more reflective of market restorations.6. While these economics might appear to place this industry in a position of poor viability. most outlets used in the 19-market study represent major integrated oil companies. Both the downward trend in margins. several competitive strategies. Thus. and has been a result of. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. assuming all other costs were unchanged. despite the predisposition of many observers to use them as such. if Canadian average pump prices were only one cent higher than they were in 1995. these findings clearly show that pump price increases are ultimately linked not to increased profits. and have resulted from. not excessive profits. crude costs. Nevertheless. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. Industry profitability is extremely sensitive to very small changes in pump price. Thus. Declining refiner and marketing margins. Also. This trend has both resulted in. but to increases in underlying rack prices. serve as perhaps the most significant indicators of competitiveness in the downstream industry. not price. 7. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. based upon an assumed posted rack price. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. and in turn. including: • • • improving production efficiency through refinery plant rationalizations (closures). Indeed. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability.

• • At first glance. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).5 million fewer litres of gasoline than a group A (major centre) station. had petroleum margins which were commensurate with average outlet throughput for that market. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Outlet throughput is a key determinant of inter-market pump price differences. other factors exist which contribute to relatively high margins and prices. The costs of most consumer goods in smaller. thereby improving petroleum volumes and ancillary revenues at the remaining sites. MJ ERVIN & ASSOCIATES 78 . although this study provides comprehensive evidence of this. Smaller. poor outlet throughputs were generally the predominant factor. more isolated markets are generally higher than in larger centres. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). When these margins were compared to their corresponding outlet throughputs. average pump prices were relatively high. according to the margin-volume model. there are three points to consider: • In very small markets. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. A wide range of petroleum gross product margins were evident within the 19market study group. it would seem that if local government in smaller markets were interested in lowering pump prices. When plotted against the margin-volume model. That such a relationship should exist was not surprising. In suggesting this approach however. reduce pump prices. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres.8. This created some economic pressure to sell product at a higher pump price. which should. most markets. isolated markets face particular challenges: although found to be highly competitive. While competitiveness in most smaller markets was shown to be as active as in larger centres. the solution would be to encourage some dealers to exit the market. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. Although some smaller markets appeared to have higher gross product margins than larger markets. and this study showed that gasoline prices were no exception. Thus. which could actually inhibit competition. reducing the number of outlets may also reduce the number of competitors. regardless of size. virtually all of the 19 study markets exhibited similar levels of competition. 9.

Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). and the traditional automotive service bay. 10. is both the cause and consequence of increased activity in ancillary operations. The loss of employment represented by a station closure may be of some concern to smaller communities. and likely others in Nova Scotia. As these findings show. Retail ancillary operations are a critical element of petroleum price competition. the degree of price competition in the retail petroleum has in effect. depressed petroleum revenues below that of outlet operating costs. does not appear to benefit in consumer terms. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. as marketers find even more innovative ways to attract market share. is viewed as an agency which exists to the benefit of industry and consumer alike. Charlottetown. and in turn. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Convenience store. has seen a decline in pump prices relative to other Canadian markets. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. characterized by narrow product margins and relatively flat pump prices. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues.• A full-serve retail gasoline outlet typically employs 3-5 staff. will likely preserve a highly competitive petroleum market. 11. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. MJ ERVIN & ASSOCIATES 79 . This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. are an acceptable limitation on pure competition (Finding 8). This competition then. is well beyond the scope of this study. many national and local environmental regulations exist for good cause. under the current PEI regulatory structure. and the perceived effect on their markets. and as such. the Halifax market. Also. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. The federal Competition Bureau for example. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. The historical record is clear however: since deregulating pump prices. in order to build upon the findings in this study towards a full understanding of the dynamics at work. car wash. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22).

as it does in the Canadian petroleum marketing sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. in a simple format designed for consumers and legislators. possibly to the detriment of the consumer. margins and competitiveness factors. that where a healthy competitive climate exists. 2. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. not inhibit. A regular comprehensive competitiveness evaluation. petroleum marketing competitiveness. and the nature of competitiveness influences. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Develop cooperative industry research into marketing sector competitiveness issues. and the converse image held in much of the public domain. This should be in the form of a quarterly summary of price trends and related measurements. Public perception measurement.This study proposes rather. direct regulatory interventions may have an adverse effect on competitiveness. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Improve public understanding and awareness of competition in the petroleum marketing sector. 1.

along the lines of the model used in this study. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and issues/opportunities facing such markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. MJ ERVIN & ASSOCIATES 81 . consumers. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. and in particular. and regulators alike. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. • • • • * * * Better understanding of this industry. by industry. using Canadian and foreign selected markets. using Canadian and foreign selected markets.

Appendices MJ ERVIN & ASSOCIATES 82 .

the retail price of gasoline that would be displayed if all product taxes were removed. GST. Usually expressed on a per-unit basis. such as a retail gasoline outlet.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. Independent Petroleum Marketer .the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. municipal tax levees. MJ ERVIN & ASSOCIATES 83 . Grade Differential . service bays. and commission dealers. Excise Tax . such as lessees. the regular unleaded pump price. health. independent dealers. car wash.. provincial pump tax. Lessee . Distribution Costs . Margin .Canadian Petroleum Products Institute. and therefore purchases its supply of petroleum product from an outside source. which serves as the voice of the petroleum products industry in Canada on environment. and included in the retail pump price. There are several modes (see below) of dealer operation. lubricants. of transporting petroleum product from the rack point to the final point of sale. Downstream . safety and business issues. etc. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. in cents per litre. generally expressed in cents per litre.a service provided in addition to the basic retail petroleum sales operation. diesel. Marketer .a generic term referring to a retail outlet operator.I Glossary of Terms Ancillary service . CPPI .a petroleum marketer who is not involved in the refining of petroleum products. etc.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. The ex-tax pump price is exclusive of these taxes. Major Oil Company . Ex-tax Pump Price .the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived.. Dealer . for example.an organization who sells refined petroleum products to end-use consumers. and in some regions.(for the purpose of this study) the cost.the difference in pump price between a premium or mid-grade of gasoline vs. such as a major oil company or regional refiner/marketer.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. but inclusive of any corporate taxes on earnings. such as convenience goods. currently established at 10¢ per litre. an association of petroleum refiners and marketers. These product taxes include Excise tax.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. Integrated Oil Company .

Throughput . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector.the segment of the oil industry involved in the exploration and/or production of crude oil.within the context of retail gasoline marketing.the wholesale price posted at the rack point. This may be at a refinery loading terminal. Transfer Price .an organization who. the supplier has initial title to the petroleum product as it leaves the rack point. Supplier .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. usually per month or per year. PCF . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. these can be broadly classified as company operated. lessee. an association of upstream and downstream oil companies and related organizations. the raw material from which petroleum products are manufactured. Although in theory the transfer price could be set at any arbitrary value. MJ ERVIN & ASSOCIATES 84 . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. In the retail gasoline sector. Upstream .Petroleum Communication Foundation. Rack Price .the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.Mode .the type of contractual relationship between the supplier and the dealer (outlet operator). and independent dealer. commission dealer.the point at which title to refined product is transferred from the refiner to the supplier. Refiner . it is usually based on the market-driven rack price. manufactures (from crude oil) a range of petroleum products suitable for consumer use.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Regional Refiner/Marketer . Rack Point .

4 134.3 96.4 104.5 126.5 30.4 45.0 30.1 167.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.8 95.1 120.9 122.1 126.2 127. using a weighted (by provincial gasoline demand) 10 city average.4 110.1 104.5 25.0 1991 126.3 122.2 50.1 1990 119.8 106.9 97.8 104.1 104.1 40.5 120.4 124.1 26.4 53.7 118.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.2 45.3 19.2 109.8 94.3 125.0 42.0 104.7 122.1 105.7 95. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.5 145.1 151.9 26.1 103.2 133.9 155.0 1988 108.4 152.2 20.3 119.1 97.8 132.3 52.2 112.3 134.9 115.6 136.4 57.2 39.2 92.7 123.4 27.8 93.4 97.1 87.9 1994 130.7 22.8 28.2 45.2 99.7 96.5 94.5 100.3 1989 114.3 40. MJ ERVIN & ASSOCIATES 85 .0 102.0 19.7 29.5 115.3 1992 128.9 26.8 1987 104.7 30.6 92.0 32.1 146.4 104.3 55.1 120.1 144. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.0 111.9 1995 133. Nominal (¢/litre) (2) RUL Ex-tax Price.4 120. 62-010: Consumer Prices and Price Indexes.3 141.0 93.9 1993 130.1 115.4 29.7 54.3 160.1 117.6 51. No.2 30.3 151.3 132.9 118.5 112.6 91. Nominal (¢/litre) (2) RUL Annual Price.5 49. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.3 139.5 111.6 107.6 133.2 31.9 108.1 48.4 136.8 47.3 58. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.0 97.4 34.8 135.0 135.3 27.3 115.7 132.0 93.8 108.2 121.2 49.7 124.1 117.6 122.8 130.5 124.4 122.2 142.0 115.

8 26.9 4.0 7.2 26.0 10.0 22.0 16.1 52.3 56.1 39.0 28.9 6.7 32.8 23.3 58.2 23.4 MJ ERVIN & ASSOCIATES 86 .5 16.8 14.9 6.1 53.4 13.2 27.0 16.3 22.5 30.2 11.2 13.8 22.3 6.7 25.2 7.9 21.9 26.0 24.3 15.4 24.9 12.0 24.2 6.7 14.8 53.5 14.2 14.2 56.3 24.8 57.1 24.1 9.7 6.6 23.7 28.2 23.2 29.9 25.1 13.6 5.9 30.5 27.3 12.1 29.7 34.1 23.4 53.9 8.0 26.3 17.7 18.9 6.7 19.5 7.3 54.0 26.9 24.9 25.1 5.0 15.2 15.6 24.1 22.2 13.7 7.8 9.8 24.3 66.5 23.5 10.7 33.1 23.3 13.0 24.0 7.3 Tax Content 23.1 17.5 27.3 14.3 13.3 25.9 22.3 13.0 26.2 63.6 7.4 33.5 23.4 26.2 7.9 31.9 7.8 16.2 22.8 14.8 28.1 23.2 24.2 27.0 5.4 13.6 26.0 7.7 8.3 57.5 31.2 13.7 23.0 9.0 25.4 26.4 20.4 32.5 19.4 30.8 30.9 56.7 29.5 6.0 25.8 25.7 19.0 16.5 26.1 16.4 29.9 25.4 8.5 35.7 31.5 54.2 26.6 54.9 14.9 23.4 14.4 21.5 57.3 6.0 24.4 24.8 55.6 13.0 54.6 23.7 12.8 15.5 5.7 7.2 16.6 18.5 28.6 26.3 5.4 22.5 8.6 8.3 26.2 14.1 13.4 31.9 53.6 26.7 24.3 15.2 65.8 11.0 16.4 57.0 13.2 13.2 5.4 15.8 33.5 33.8 14.6 25.8 53.1 18.9 26.0 24.4 7.8 55.4 9.5 25.0 24.9 14.4 31.3 4.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.2 27.4 55.1 22.9 55.8 14.9 54.3 23.7 15.7 58.5 7.3 9.1 25.5 23.7 13.6 52.3 13.6 9.6 54.0 33.4 12.8 26.0 8.3 56.9 9.5 56.9 25.2 16.0 24.0 12.7 4.9 25.2 21.9 55.9 23.1 16.7 Downstream Margin 14.3 42.1 16.4 14.7 4.0 55.7 39.4 34.5 11.6 28.5 26.5 10.8 21.2 41.1 19.6 4.1 53.1 7.7 14.6 6.6 54.9 58.6 21.6 20.9 53.7 14.9 17.8 21.1 16.3 54.3 26.7 29.3 22.2 25.2 12.9 15.7 14.4 58.4 26.2 8.3 13.1 13.0 4.7 29.0 20.8 8.5 Gross Marketing Margin Gross Refiner Margin 53.9 23.7 18.9 11.8 13.7 14.7 4.7 63.5 14.8 8.3 54.1 18.0 52.2 7.2 4.2 7.9 7.0 14.1 21.2 6.9 7.5 22.5 32.9 13.4 14.8 23.8 29.2 25.7 7.6 13.6 25.1 7.9 4.Table B: Key Price / Margin History .4 56.4 14.9 56.5 15.

3 26.5 14.7 14.5 25.2 11.1 51.6 53.1 11.7 15.9 4.9 14.5 15.4 21.1 15.6 9.4 26.1 14.1 14.7 16.2 23.3 54.2 15.2 54.0 57.9 12.6 21.9 9.1 16.4 15.5 11.2 49.1 11.0 28.2 28.0 27.1 15.2 26.3 7.8 4.3 9.1 61.6 17.7 29.5 21.0 5.4 26.5 3.4 26.9 26.5 53.7 24.3 55.1 Tax Content 26.3 26.4 21.6 15.2 14.3 21.6 16.4 25.7 3.3 25.7 12.7 13.0 14.8 28.9 28.2 9.5 19.3 12.8 27.1 26.1 14.3 28.7 5.0 52.7 25.0 9.5 54.2 20.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.3 26.8 6.0 6.5 2.1 10.2 7.4 6.7 51.3 21.7 6.2 25.1 24.5 23.9 49.0 12.4 32.9 27.6 20.1 15.0 24.4 51.1 26.1 20.8 25.3 4.0 28.3 26.9 12.0 28.1 6.7 53.0 5.5 7.3 13.1 3.7 13.0 25.3 58.9 49.9 23.9 29.9 17.7 53.6 53.8 20.7 23.5 28.9 58.5 21.1 55.0 6.1 6.2 Gross Marketing Margin 4.5 21.0 9.7 26.2 27.8 29.1 21.6 11.1 6.3 27.8 49.4 25.3 26.5 7.3 28.4 5.3 53.7 7.2 4.8 23.7 7.5 6.6 15.1 11.0 6.8 22.6 23.9 19.1 57.9 4.4 24.7 14.9 29.2 7.7 6.1 11.7 26.2 14.2 7.9 6.5 13.6 4.0 54.7 8.4 28.2 26.4 6.3 26.7 24.9 11.4 6.2 4.8 10.6 4.4 16.1 Gross Refiner Margin 7.0 26.7 25.5 11.2 5.3 8.6 27.7 53.3 26.8 50.0 29.5 6.3 4.7 52.0 12.1 26.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .5 13.6 10.0 25.2 12.4 7.5 3.6 19.1 51.6 12.0 28.5 17.3 9.3 4.1 6.8 17.0 14.3 7.2 20.4 13.6 3.2 14.6 20.5 9.3 9.4 11.5 5.1 54.5 6.4 4.0 53.8 52.9 5.2 25.4 26.9 14.3 26.6 5.3 23.0 11.8 23.5 4.7 18.7 3.2 26.9 27.9 Downstream Margin 12.4 6.5 19.2 7.6 10.5 20.9 3.0 26.7 5.0 28.8 28.3 6.5 55.3 26.5 5.

422.2 29.297 2.287 2.366 2.140.089.141.682.379.218.779 2.669.6 24.900.045 2.441.373.7 29.067.934.710.4 22.141.998.326.191 2.878 2.181.095 2.025.7 18.255 3.804 3.281 2.8 23.8 22.321.8 21.322 2.808.612 3.316.796.122.192.775.633 2.682 3.773.733 2.8 29.933 3.752 2.Table C: Canadian Supply.345.9 29.4 24.714.242 2.4 25.625 2.457 2.427.516.5 27.968 3.477.325 2.377.889 3.613 3.202.333.0 20.509 3.1 23.437.206.113.430.9 21.3 23.331 2.802 2.2 27.2 27.651 2.193 3.299 2.2 26.615 2.083.600.0 28.490 3.604 2.827 3.279 2.666.4 29.193 3.499 2.202 3.070.558.969 2.268 2.966.0 24.5 31.532.667 2.114 3.132.642.218 3.022.182 3.716.246 2.073 2.709 2.970 3.429 2.075.9 26.131.479 2.897 3.720 3.450 2.415 2.254.818.7 26.051 3.102.286.003.810.370 2.152 2.558.151.180.120.930 3.3 23.026 2.979 2.323 3.785.9 30.886 3.931 3.285 2.301 2.8 23.179 3.313 2.095.693 3.389.890.1 16.180 3.833 2.687.324 2.473.633.469 4.361.180 2.070 3.322 3.101.970.262.8 30.2 23.518.000 3.4 21.9 23.037 2.830.864 2.335 2.897 2.1 23.841 2.381 2.4 31.011 2.673 2.130 3.130 3.299.301.941 2.735.804 2.081.5 22.245.871 2.8 33.142.7 34.619 2.8 MJ ERVIN & ASSOCIATES 88 .9 19.976.2 20.967 2.3 Canada Avg RUL Rack Price (¢/l) 35.6 21.859 2.1 22.767.904.3 22.566.250.952.7 31.498.300.958.3 22.840.458.636.822.672.837.220.646 2.1 21.269 2.201.476.661 Canada Avg ex tax RUL pump price (¢/l) 39.592 2.291.8 26.027 2.661 Canadian Domestic Gasoline Sales (M3) 2.744.7 29.160 3.101 2.521 2.294.188 3.232 3.831.637 3.813 2.641.085.732.4 24.703 2.209.5 30.3 26. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.020 2.369.869 2.508.564 2.7 21.781.456 2.029 2.4 21.599 2.161.893.621.108.5 19.461 3.9 31.897.4 32.884 2.798.587.2 22.823.970.739.439.354.462.729.9 26.565.338 3.725.572 2.630.748.7 24.622.844.636.743 2.2 24.5 23.801.510 3.938.416 2.843.995.164.287 2.9 23.403 2.122 2.015 3.865.873.874 3.047 3.141 3.270 3.688.767.7 24.876.369 2.9 17.176 3.412 2.2 27.5 25.329 3.6 28.932 2.235 3.097 2.346.501.887.654.045 2.3 24.030.315 2.5 27.609.168 2.960.979 3.133 3.287.782 3.620 3.035 2.047 2.311 3.409.6 23.930.2 21.2 26.7 29.644 3.256 2.281.112 2.176 2.765 3. Demand.044 2.443 2.626.880 Canadian Retail Gasoline Sales (M3) 2.5 32.378.7 28.429 2.853 2.322 2.628 3.647.8 28.853.839 2.199 2.480.627 2.039.251.5 28.801.853 3.263.2 23.894.002.437.9 22.254.580 3.301.709 2.973.799.2 27.8 27.298 2.589 3.677 3. Inventory.1 23.1 29.045.684 2.411.502 2.283.671.254 2.6 26.748 2.544 3.771 3.485 2.056 3.455.475 2.019.295.9 23.883.935 3.

977.0 26.928 3.4 20.863.658.8 25.250.214 2.9 22.8 21.8 24.414 3.516 3.840 2.415 2.336.2 25.170 3.806.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.649.006 3.799 2.667 Canadian Domestic Gasoline Sales (M3) 3.539.123.999 3.669 2.797.936 3.204.198 2.7 19.714 2.386 3.324 2.2 26.692.165.077.881.7 22.294 3.9 29.317 2.8 28.656 3.825. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .638 2.179.184.601 3.376.6 20.5 source: Statistics Canada (production.182.264 2.148.0 24.0 25.864 2.521 2.315.660 3.037 3.997 2.5 21.141 2.649.130 3.648 3.320 3.1 21.505 2.082.617 2.857.889.261.703 3.426.386 3.005 2.555. demand.940 2.620.4 26.149.5 21.871 3.644 3.442 2.984 3.346 2.830 3.970.097.961.324.198.986.679.467 2.112 3.480 2.222 2.219 Canada Avg ex tax RUL pump price (¢/l) 27.0 26.6 20.4 26.338 2.2 25.753 3.4 25.671.785.773.055 2.607.068.994 3.344 3.0 25.519.244 3.904.195.930.675 2.382.965.919 2.906.5 25.363.205 2.614.048.7 21.170 Canadian Retail Gasoline Sales (M3) 2.717.9 27.390.597 2.593.198.155 2.537.483.606.370.469.791 3.074.1 24.7 Canada Avg RUL Rack Price (¢/l) 20.796.8 20.566 3.264 2.

9 62.9 58.7 52.9 55.5 60.9 52.2 54.5 45.9 53.7 53.9 59.9 56.2 62.9 55.2 50.5 57.6 55.5 52.9 50.4 54.7 53.6 53.3 52.4 65.5 59.2 56.5 58.4 56.0 59.Table D: Pump Price History .0 Sioux Lookout 62.3 61.4 52.3 54.9 54.9 46.8 57.4 55.2 50.2 62.9 64.9 61.4 61.8 52.9 56.0 50.5 61.6 54.4 55.5 62.0 61.7 50.5 Vancouver 53.5 53.9 56.8 56.1 53.2 46.5 59.8 51.6 62.4 52.5 56.3 50.2 57.9 52.8 47.7 51.5 49.5 56.0 57.2 43.5 57.5 50.7 52.9 53.1 44.9 54.5 60.9 56.8 50.9 64.2 61.4 56.4 53.0 61.9 56.9 61.3 49.9 56.9 57.2 63.4 Winnipeg 49.4 53.9 49.8 47.3 55.9 44.1 49.5 58.7 57.9 53.1 56.6 48.7 62.7 53.5 57.9 51.2 54.5 61.2 46.8 48.5 51.7 51.9 56.5 57.4 61.5 60.9 52.4 46.3 48.9 59.2 62.5 47.4 55.6 58.8 52.5 57.6 49.4 52.5 51.9 61.9 56.5 57.9 54.2 46.5 57.9 61.0 61.0 58.9 47.5 57.9 64.5 59.9 51.4 46.5 56.8 56.1 49.5 55.6 46.5 57.9 55.5 53.3 52.8 48.5 58.0 61.4 53.4 57.9 62.3 52.7 50.6 47.8 55.1 50.9 53.4 56.1 49.2 62.4 54.6 59.5 55.9 56.3 62.7 49.4 48.9 52.8 59.4 46.5 46.9 53.8 64.7 White Rock Calgary 45.8 53.4 57.9 56.5 58.8 56.4 56.4 56.9 44.9 52.1 53.1 55.6 44.2 50.3 49.6 54.5 54.9 52.0 54.9 51.7 65.3 54.0 52.8 52.3 59.9 56.3 52.5 51.4 61.1 52.8 52.6 48.5 54.6 56.7 46.3 50.2 54.5 58.7 48.0 59.1 52.4 59.8 53.5 47.6 55.5 47.5 56.0 39.2 62.5 58.7 45.1 60.7 65.9 54.4 47.8 41.2 47.9 58.9 47.1 50.8 56.5 60.4 55.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.9 52.9 61.2 62.5 57.4 52.9 49.8 59.7 65.2 62.8 52.9 53.2 48.5 59.7 48.8 56.6 47.4 54.9 49.0 61.9 54.7 51.7 65.5 59.9 MJ ERVIN & ASSOCIATES 90 .3 56.2 59.9 64.5 60.5 57.2 65.9 55.6 47.8 Thompson 59.9 58.2 Nanton Peace River Regina 49.5 58.6 50.2 62.2 55.8 44.4 50.3 42.7 54.9 53.0 55.7 54.2 51.0 52.6 48.5 58.8 56.9 45.9 54.4 58.0 48.9 48.5 60.8 48.2 51.7 44.5 45.5 59.2 51.1 59.6 58.5 51.9 58.4 63.5 52.8 53.5 59.7 57.4 52.4 56.3 51.6 52.5 58.4 55.7 62.9 58.2 65.0 44.7 54.5 57.4 49.9 53.1 43.9 51.3 52.1 55.0 61.9 54.5 51.3 55.8 57.0 46.3 48.8 50.1 41.9 47.8 45.4 58.6 46.8 49.5 59.8 54.9 61.1 44.6 53.8 53.9 47.0 62.0 61.4 55.5 59.7 63.9 53.5 58.0 62.1 55.9 53.5 56.7 45.0 62.5 58.5 57.6 50.2 58.9 57.2 62.9 64.9 54.6 51.9 63.5 58.7 65.8 48.5 53.9 53.

2 54.1 59.9 58.3 59.5 51.6 52.5 Ottawa 58.9 53.2 52.7 51.7 53.1 51.1 56.6 51.6 59.5 57.9 60.6 63.2 54.3 55.0 55.0 55.7 60.4 55.7 58.4 54.9 53.8 57.3 54.8 54.8 55.6 50.9 55.3 52.2 56.6 56.9 53.3 49.6 51.4 54.9 61.1 54.6 54.0 56.1 61.1 60.6 55.0 57.0 55.9 58.4 50.9 57.4 52.9 62.6 54.1 55.8 57.2 57.7 48.1 53.7 56.1 61.9 64.0 49.7 57.2 57.5 64.6 53.2 57.2 56.1 58.2 57.0 57.5 56.2 56.1 56.4 58.7 59.6 58.6 56.3 54.7 52.0 60.0 52.8 61.2 57.5 57.7 54.8 52.6 55.0 59.7 56.6 51.4 52.5 54.1 53.9 60.7 47.7 51.7 57.2 54.1 52.5 63.6 59.9 61.8 53.7 46.6 63.6 54.3 52.7 48.6 50.1 54.3 54.0 59.0 47.2 Chicoutimi Gaspé Saint John 60.5 54.9 64.1 57.6 52.9 54.6 52.2 61.Table D: Pump Price History .8 60.3 52.1 54.9 54.5 52.8 Halifax Charlottetown 60.2 53.1 58.8 47.6 56.4 58.6 49.0 54.2 53.2 58.8 63.5 56.0 55.4 54.3 54.9 55.9 50.4 58.5 52.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.1 49.3 59.2 56.6 55.9 53.3 56.7 57.7 56.1 53.3 61.0 50.5 54.2 49.2 55.1 48.9 49.5 56.6 52.5 60.4 57.5 48.0 61.9 56.3 60.3 62.1 54.7 57.1 55.2 55.7 57.3 56.6 55.7 50.9 55.5 51.3 52.3 54.5 52.0 54.3 59.5 61.4 57.8 50.8 54.4 57.7 51.8 55.9 61.9 63.0 61.8 57.9 61.3 49.2 60.1 55.5 57.0 56.3 55.4 54.8 53.2 57.6 60.5 59.5 53.9 55.9 61.8 55.9 56.3 54.0 57.5 57.6 58.4 60.7 52.9 55.2 52.4 57.6 57.4 49.0 52.2 Montreal 63.8 60.2 58.9 57.7 51.2 61.0 52.8 54.2 57.3 55.5 54.8 52.2 55.7 56.5 54.6 49.0 54.1 55.1 57.4 54.2 61.3 55.1 61.4 54.5 53.7 54.9 55.4 54.0 52.0 60.1 57.1 58.1 55.6 53.2 50.6 61.4 58.3 56.5 63.1 54.2 57.5 61.8 61.8 56.2 52.5 58.1 53.1 Toronto 52.2 51.6 54.3 55.4 53.2 56.5 61.3 53.7 54.2 58.2 59.5 63.5 51.4 57.5 55.6 63.0 48.3 54.1 52.8 55.2 60.6 54.1 55.2 49.4 58.8 50.6 Canada Avg 55.1 59.6 58.8 55.8 55.8 55.8 59.3 59.6 54.3 53.7 52.9 51.9 56.6 52.3 57.2 53.9 56.9 57.0 57.3 53.7 64.8 56.3 51.9 52.7 56.3 56.4 58.0 56.6 52.6 58.7 55.1 53.8 49.7 44.9 64.8 54.8 55.4 55.2 51.5 67.3 55.5 53.2 55.8 51.0 50.4 51.2 55.5 60.0 55.9 55.2 57.5 52.0 53.6 55.0 52.0 47.0 50.9 49.0 58.2 57.5 57.9 55.7 58.4 53.6 56.0 53.2 56.6 53.0 60.5 59.1 51.4 53.0 48.7 49.0 54.3 54.6 54.5 54.5 64.3 53.5 53.1 56.0 59.3 56.4 51.2 56.9 49.4 51.2 54.2 49.4 53.0 55.3 54.1 60.6 58.9 55.5 59.2 51.7 54.6 53.5 55.5 56.6 52.6 55.1 58.6 59.7 54.5 55.6 50.0 51.1 54.2 59.8 50.2 56.5 MJ ERVIN & ASSOCIATES 91 .7 53.1 51.7 59.6 55.9 57.0 60.9 53.9 60.5 56.8 49.9 55.3 53.5 54.7 56.0 53.9 54.9 49.5 51.2 49.8 53.2 55.1 52.2 54.6 61.7 54.4 57.3 58.4 45.0 51.0 52.4 54.

7 31.4 22.1 20.5 26.6 26.9 27.3 23.3 29.0 24.9 21.4 27.2 25.6 27.2 29.1 28.8 24.6 26.4 27.0 26.8 26.4 28.7 30.5 29.7 26.9 21.9 Oct-94 32.9 27.8 27.3 21.0 27.4 29.1 25.1 23.4 25.7 24.7 28.9 28.3 30.4 29.2 24.5 27.6 Jun-92 32.7 26.0 29.4 31.9 20.8 27.0 25.9 26.7 30.8 23.5 Aug-94 28.6 26.5 29.0 May-93 29.4 Dec-92 31.9 30.1 25.1 22.5 24.6 22.1 25.8 28.6 24.9 28.2 24.7 28.6 30.6 30.4 29.3 26.8 31.9 30.5 29.8 Toronto extax 26.0 May-92 28.3 30.2 26.4 25.7 29.8 25.3 30.9 29.0 32.9 23.5 Oct-95 30.7 24.6 28.2 Dec-94 26.3 Dec-95 Edmonton Regina extax extax 27.2 26.4 30.4 24.2 Jun-94 31.8 24.0 23.4 23.2 24.8 28.5 25.3 May-94 28.7 26.3 28.7 27.2 28.3 29.3 26.8 26.6 23.9 24.4 23.3 31.4 23.6 26.3 24.0 Oct-93 28.2 Apr-93 28.0 31.5 26.1 24.6 30.2 Nov-93 27.7 Jan-92 31.9 27.4 28.1 31.1 27.6 25.5 27.2 22.2 27.7 29.3 33.4 25.2 Nov-92 31.6 26.5 23.3 26.3 29.5 Oct-92 30.6 27.2 25.6 Sep-93 28.3 29.5 27.4 29.9 28.9 Jul-93 28.1 19.0 28.6 29.5 24.8 29.6 28.6 23.9 30.7 25.1 27.4 Jun-95 30.8 Jan-94 25.6 23.9 Aug-93 30.4 31.0 Jun-93 26.6 24.9 29.1 Apr-95 30.3 28.4 27.4 22.0 23.4 21.0 23.3 28.5 28.6 27.3 29.0 25.0 22.2 27.7 27.6 Aug-95 30.9 25.4 27.4 20.3 29.0 27.8 27.3 32.8 Feb-94 24.2 23.3 23.5 21.5 23.2 29.3 Jan-93 30.5 Nov-95 30.4 25.0 31.0 Apr-92 30.9 29.0 23.1 26.8 27.9 25.2 28.7 30.8 22.3 26.7 28.4 26.7 30.9 26.8 26.0 24.7 Sep-95 30.5 Jul-94 29.8 26.3 28.8 25.4 30.1 24.3 Feb-95 26.3 29.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.1 28.4 Mar-92 28.6 26.3 29.7 28.7 Mar-94 28.9 25.8 24.4 20.5 21.4 29.2 32.6 29.3 24.1 Apr-94 29.9 24.2 28.1 30.3 Jul-92 31.1 22.2 Nov-94 29.0 21.0 24.5 Feb-92 28.8 21.9 24.4 25.9 28.2 28.6 26.3 26.7 28.6 Mar-93 28.5 29.7 29.3 28.7 Winnipeg extax 27.4 30.4 24.8 27.4 28.8 29.3 27.1 24.3 30.9 23.5 Sep-92 29.8 27.8 24.4 22.5 27.9 25.4 29.1 30.6 25.8 25.9 27.6 29.0 25.1 Mar-95 29.2 26.0 26.4 27.2 26.4 31.8 Dec-93 26.Table E: Ex-tax Pump Price History .9 25.0 23.9 24.6 23.6 29.6 26.7 28.7 26.7 Sep-94 32.4 31.4 31.6 21.2 24.5 29.5 24.9 26.4 20.5 Jul-95 30.4 29.9 26.1 Feb-93 29.6 May-95 29.7 30.5 27.8 28.9 31.1 31.1 26.3 24.8 29.4 MJ ERVIN & ASSOCIATES 92 .3 29.9 24.4 30.1 25.4 31.7 Jan-95 27.3 29.6 27.0 26.3 27.4 31.8 29.6 22.7 29.7 Aug-92 24.

3 31.9 29.5 30.1 24.9 23.8 28.1 29.8 32.8 25.6 24.2 27.3 26.6 27.4 33.7 24.4 22.8 23.9 29.1 24.6 26.9 30.9 27.6 28.7 22.8 26.7 26.5 36.1 34.3 29.8 28.6 34.4 33.2 36.3 28.3 31.4 28.2 23.2 27.0 34.4 34.4 33.2 22.3 29.8 32.3 27.8 23.5 31.9 29.1 29.9 29.3 34.5 25.9 26.1 34.0 32.9 27.6 26.0 29.1 32.5 28.5 25.4 32.2 32.3 29.1 34.5 32.7 23.1 29.9 29.7 24.1 24.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.7 32.2 30.4 25.6 32.7 29.1 30.5 28.5 30.4 21.5 24.9 27.7 27.5 26.8 27.9 29.7 34.7 27.4 33.6 28.8 26.0 27.5 28.8 30.8 26.9 27.8 32.8 28.2 33.7 25.9 30.4 32.4 36.3 25.0 28.4 32.7 28.6 22.2 27.5 33.1 24.2 29.0 33.3 25.0 34.2 27.0 29.5 27.0 30.8 30.2 27.9 35.8 28.5 25.7 26.3 27.6 27.5 30.4 24.0 34.9 27.3 25.8 23.7 26.6 28.7 26.8 32.1 30.7 24.9 32.9 32.0 28.8 29.7 28.3 28.2 21.6 36.7 24.2 22.8 28.2 24.9 24.4 26.7 34.8 25.7 28.8 26.0 26.3 25.8 33.0 30.3 23.7 23.8 36.0 23.0 26.2 26.7 26.2 22.3 28.8 25.3 28.4 25.6 28.3 26.4 28.2 25.0 28.6 32.1 32.4 26.6 36.0 36.0 33.8 23.6 23.2 30.3 34.8 24.9 33.3 28.5 27.8 33.6 26.7 33.6 28.4 33.8 27.2 28.3 30.0 36.3 34.0 32.1 28.2 36.1 22.4 25.7 24.6 Charlottetown extax 36.3 35.0 23.Table E: Ex-tax Pump Price History .5 24.6 33.5 28.4 31.2 27.3 29.9 32.8 29.9 28.2 30.7 30.8 26.2 Saint John Halifax extax extax 34.3 33.9 37.2 28.5 31.5 34.1 32.0 25.6 29.8 27.1 26.4 24.3 24.6 32.1 26.2 26.7 28.5 25.5 27.5 25.0 28.6 34.3 22.0 25.7 27.1 23.4 36.5 33.7 26.2 25.4 25.6 27.9 29.2 22.0 33.1 Montreal extax 31.2 32.5 26.5 25.2 27.8 25.8 29.1 30.2 27.3 31.2 26.1 31.9 30.7 30.9 31.2 26.6 29.7 32.0 28.0 31.3 31.0 33.4 31.4 26.1 25.8 28.7 MJ ERVIN & ASSOCIATES 93 .5 33.2 25.3 31.9 30.0 29.7 Quebec extax 32.2 27.2 33.8 29.0 26.5 27.9 28.3 29.2 32.6 31.1 28.7 32.7 29.8 30.2 24.6 26.5 29.8 29.9 31.2 25.9 32.4 27.6 25.2 26.9 26.1 32.6 23.6 32.7 27.9 30.2 34.7 23.8 27.6 25.9 26.2 28.7 28.0 25.6 32.8 Canada Avg extax 29.6 33.4 31.0 33.9 33.6 31.3 26.

2 23.0 21.5 19.7 20.7 21.8 20.3 19.9 23.2 18.2 23.7 20.4 21.4 21.7 22.9 25.2 16.1 21.2 21.9 21.0 21.7 22.7 16.8 19.6 20.3 20.2 21.5 22.3 21.4 21.3 22.4 22.9 18.3 19.5 17.9 21.7 23.6 21.7 22.9 18.7 22.3 23.8 18.5 23.8 20.1 20.4 17.1 18.6 21.7 21.2 20.3 18.6 23.3 19.1 15.4 22.8 21.1 22.4 21.5 18.8 22.1 21.3 22.6 23.7 23.4 22.5 24.9 22.7 17.6 20.6 19.5 21.6 23.4 20.7 19.4 15.3 17.3 19.7 19.1 20.1 21.7 22.9 20.3 23.4 20.1 21.1 23.7 21.7 17.6 25.3 23.8 21.5 18.6 23.5 21.5 21.2 20.1 16.3 18.4 21.3 21.8 21.2 20.6 19.2 19.0 21.7 18.Table F: Rack Prices .7 MJ ERVIN & ASSOCIATES 94 .0 23.4 21.3 20.3 21.0 22.2 19.1 23.9 22.3 23.5 23.3 17.8 18.1 22.2 16.1 15.0 20.5 27.9 24.1 22.2 21.2 22.0 23.7 22.7 22.8 20.1 22.4 22.6 20.0 23.8 18.3 24.4 22.8 21.2 21.1 22.4 21.1 20.7 22.8 25.5 20.7 20.7 21.9 22.5 17.8 23.2 22.3 23.8 22.5 21.9 18.0 22.7 18.0 19.5 21.1 19.8 22.2 23.2 22.7 21.5 21.0 22.0 21.9 21.1 22.5 22.3 17.4 18.4 23.6 20.0 23.5 24.0 21.9 17.4 21.1 Halifax rack 20.0 23.1 23.9 21.7 21.5 23.5 22.5 22.4 20.4 21.1 21.6 19.8 23.4 24.1 20.0 19.9 20.4 22.0 19.8 Ottawa rack Thunder Bay rack 20.9 19.3 24.4 20.4 20.3 20.9 21.4 21.6 25.4 19.2 20.5 22.9 18.1 20.9 22.1 24.1 21.8 20.8 24.0 22.6 23.6 19.2 19.6 20.4 22.4 21.1 20.3 22.8 22.5 22.8 19.5 20.9 22.5 21.1 20.1 21.3 23.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.8 19.8 23.8 18.8 22.4 21.5 26.8 21.4 23.2 Quebec city Montreal rack Toronto rack rack 19.5 20.4 22.4 22.3 21.6 25.4 23.5 17.0 23.6 18.6 20.4 22.7 21.0 23.5 20.2 29.6 19.8 23.6 20.3 26.0 23.1 19.5 21.2 21.3 18.2 18.2 23.3 20.9 22.8 20.2 18.0 24.6 22.6 19.2 20.9 22.8 23.2 21.8 23.2 17.5 24.2 21.1 21.8 20.6 23.2 18.2 18.0 21.3 22.2 16.7 22.4 22.8 27.1 22.1 20.5 19.9 21.3 23.2 21.8 21.4 23.3 21.7 17.0 22.1 19.8 19.8 23.2 20.0 20.0 21.0 22.9 20.9 23.4 21.

2 20.2 22.5 18.9 21.5 Canada avg rack 22.1 21.3 18.7 24.8 21.9 19.0 22.9 18.4 22.8 25.9 24.9 22.2 22.1 22.5 23.9 20.1 22.0 21.1 16.5 21.8 22.2 22.6 22.3 19.3 23.9 22.6 17.4 23.9 21.5 21.6 19.1 23.6 20.7 21.0 17.9 21.7 22.5 21.0 24.9 22.7 24.8 21.1 24.3 21.9 23.7 22.6 21.6 23.2 22.0 24.3 23.7 22.5 17.2 19.1 23.8 20.0 17.4 23.1 21.9 21.3 23.3 20.4 21.5 22.1 23.9 22.5 24.6 23.7 22.3 22.0 24.2 22.3 24.6 23.5 21.6 20.3 20.9 23.7 17.7 23.8 Vancouver Victoria rack rack 24.1 22.1 25.7 21.1 20.4 24.9 21.2 20.7 17.4 24.3 21.8 23.6 22.9 19.4 22.6 17.0 23.6 23.5 23.2 24.8 24.Table F: Rack Prices .5 20.7 21.0 22.0 21.7 22.9 21.8 23.6 21.2 21.2 24.8 22.9 23.1 21.0 18.3 23.5 21.8 22.3 21.7 22.4 24.9 22.9 20.4 21.6 21.4 21.0 22.1 18.4 22.5 22.9 19.7 23.9 23.3 23.7 21.1 23.0 22.6 23.6 22.8 21.4 25.2 22.7 21.9 23.8 23.6 21.5 21.6 21.1 19.8 22.9 24.0 22.8 22.8 23.5 20.5 23.6 21.5 23.2 22.0 18.6 21.9 23.8 20.5 20.9 19.0 22.4 23.2 24.3 24.8 19.2 22.6 21.2 19.0 21.4 20.7 22.9 19.1 23.6 23.1 20.6 23.1 22.4 22.2 Edmonton Rack 23.0 23.7 21.1 20.1 16.5 21.7 21.0 23.7 21.2 24.1 23.3 21.0 21.6 24.7 21.7 23.1 21.1 21.9 19.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.1 22.1 21.3 19.4 19.7 23.0 23.0 21.2 24.5 21.4 21.7 20.5 MJ ERVIN & ASSOCIATES 95 .6 19.4 21.6 25.4 21.6 22.9 22.0 24.7 25.3 24.5 24.6 25.2 20.7 25.0 20.7 19.9 24.6 25.5 19.7 21.3 22.1 23.2 23.6 24.4 21.3 22.1 21.2 21.1 19.5 23.6 20.5 19.1 23.8 20.5 22.5 22.7 22.5 21.7 22.7 24.8 18.3 23.8 20.1 21.0 22.7 18.9 21.7 22.4 22.9 18.9 19.2 23.4 20.1 22.5 24.2 21.9 17.7 21.5 19.8 24.2 20.1 23.5 22.3 20.1 23.5 18.6 21.5 21.3 20.5 23.8 22.4 19.2 21.9 22.5 24.1 18.3 17.0 20.2 23.3 22.5 20.9 20.4 21.5 23.6 23.0 23.3 24.4 24.3 23.1 17.2 18.5 19.9 21.3 17.6 21.2 23.2 23.8 20.3 17.5 22.6 20.1 25.0 20.0 25.7 23.4 18.2 20.8 21.2 21.0 22.2 23.1 25.7 21.4 23.9 22.0 20.9 22.8 24.9 21.

985 636.45 53.018 2.014 3.07 61.052 84.113 2.60 49.636.370 41.42 53.712 1.890 2.10 63.101 256.97 63.000 1.92 51.85 54.250 748.905 183.704.86 56.10 52.10 59.13 58.811 120.40 63.420.628 702.438 591.00 67.448.93 63.400 142.625 64.145.72 74.24 61.859 240.796 529.698 Note: Regional.483 63.20 59.241 451.529 123.850 126.268 478.810.00 57.90 67.834 71. and All Study Markets are weighted (by market population) averages.120 570.173 568.55 58.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.03 58.26 44.30 54.23 63.246 2.000 217.00 57.74 57.557.669 203.687 1.30 63.89 65.211 15.65 54.00 66.837 329.153 316.702.832 91.97 51.194.614 3.50 55.620.00 48.238 2.796 2.749 91.20 54.543 2.23 53.377 30.53 61.903 33.332 101.460 833.245 351.02 51.30 68.334.10 53.20 61.949 1.018.80 64.475 1.119 632.88 54.101 447.40 54.174.671 399.20 60.30 54.70 55.058 2.141.72 63.20 58.686 273.78 67.00 62.298 576.Table G: Study Market Data .53 48.643 184.483 2.621 102.30 57.093.73 65.702 333.34 63.25 57.830 2.971 473.749 243.32 51.26 63.40 58.18 51.11 58.102 98.60 60.89 61.060.94 55.508 2.980 120.858.895 600.40 59.414 450.220 389.98 59.897 350.009 54.40 61.48 56.997 397.87 61.66 50.150 48.770 2.90 62.16 59.50 56.30 66.249.296 179.000 1.790 185.19 52.945.549 111.030.88 64.554 2.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.935 758.056.214 248.745.678.83 68.60 70.17 Diesel 64.894 1.70 49.412 722.28 65.26 49.38 56.90 63.500 378.85 48.60 50.35 73.933 25.234 799.89 60.36 54.196 669.45 63.204.983 1. MJ ERVIN & ASSOCIATES 96 .50 56.300 578.19 49.192 2.30 52.972 429.922 103.516.000 63. Urban.513 19.22 59.597 2.166 102.72 58.

83 22.90 27.88 20.47 27.45 20.83 24.76 25.43 28.25 27.07 26.16 21.81 28.21 27.65 21. and All Study Markets are weighted (by market population) averages.74 21.33 22.08 25.45 24.84 28.95 22.39 Note: Regional.98 25.16 22.63 24.88 28.38 24.58 25.25 31.15 27.89 29.39 22.36 26.89 28.89 26.63 26.07 24.54 28.59 28.45 28.69 23.51 25.43 20.87 26.84 28.41 27.83 23.04 24.51 25.26 27.26 28.59 22.93 23.47 20.83 25.75 22.97 22.18 28.41 22.92 30.63 25.81 27.88 22.42 27.17 20.56 22.31 22.39 21.43 21.97 25.93 27.07 26.47 28.69 27.02 23.81 25.55 28.23 26.Rack Price.45 24.89 25.95 25.45 29.18 25.33 21.45 22.27 29.01 22.63 21.34 20.50 25.43 20.35 25.03 24. Tax (by Grade) Rack Pt.08 23.97 23.90 26.95 Premium 26.39 22.68 Diesel 36.45 20.64 28.49 21.59 24.78 Product taxes Midgrade Regular 26.51 20.42 25.99 26.01 28.33 21.49 31.27 20.73 32.21 27. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26. MJ ERVIN & ASSOCIATES 97 .33 22.92 22.25 28.51 31.15 24.33 27.96 22.32 21.36 24.23 24.98 28.33 22.45 23.23 23.57 22.20 20.59 28.76 24.55 28.30 29.88 22.99 28.09 24.15 20.34 25.96 24.92 20.06 28.23 25.82 28.94 23.13 23.03 20.45 25.28 23.81 21. Urban.63 28.25 24.75 27.33 21.95 22.57 29.37 27.09 27.93 23.40 27.96 24.03 21.40 25.45 29.63 20.83 24.07 24.92 21.88 28.28 22.15 29.38 24.45 20.33 21.73 26.49 21.34 26.11 26.Table H: Study Market Data .88 20.82 21.16 29.59 22.45 20.48 25.42 24.85 28.20 27.65 27.43 21.39 21.91 21.07 24.49 25.32 33.53 23.42 24.65 26.04 26.50 20.59 28.83 24.33 21.

47 0. Costs.64 3.85 11.36 0.56 24.53 22.51 11.64 1.29 8.28 1.52 5.66 28.89 28.50 3.24 7.85 24.35 27.39 56.60 23.05 6.44 25.08 3.23 38.17 11.08 0. Variance uses the formula [n∑x2 .07 0.89 21.22 5.96 28.75 23.24 7.77 30.98 1.30 5.27 60.04 22.73 10.63 60.62 56.50 58.27 11.98 0.02 3.97 0.79 0.37 26.38 7.85 26.81 28.15 66.21 8.38 0.91 0.16 3.91 29.56 4.95 21.58 1.84 5.31 23.77 37.73 1.75 28.19 5.02 0.44 56.04 28.00 0.31 28.00 58.04 0.18 55. Urban.82 32.76 5.02 13.99 0.16 20. and All Study Markets are weighted (by market population) averages.10 6.28 56.59 4.99 2.33 .25 1.00 4.20 5.68 7.17 9.89 0.88 5.13 0.06 0.10 3.27 6.43 0.83 12.95 6.83 27.35 60.44 33.07 30.11 31.14 7.45 6.29 7.90 59.00 22.38 2.13 11.78 2.12 23.34 0.71 33.26 3.07 0.Table J: Study Market Data .14 60.41 29.16 54.08 55.83 21.47 58.43 23.38 28.18 7.50 10.08 17.30 12.73 22.22 14.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.(∑x)2 ]/n2.23 7.83 36.60 7.79 33.85 21.03 28.93 56.033 0.41 7.57 12.98 31.11 26.68 7.96 3.13 28.91 22.38 22.36 20.94 17.82 95 Retail Gross Product Margin 6.64 2.01 0.42 2.68 2.70 22.90 23.64 3.88 31.17 1.50 0.12 6.49 2.94 22.83 1. Average Deviation is the average deviation of the market values from their mean (average) value.33 9.91 2.31 0.26 27.48 7.27 62.29 24.45 1.01 31.49 57.58 66.31 34.Blended Prices.24 23.20 14.03 7.21 8.73 2.34 1.53 6.63 58.26 5.86 28.22 1.28 1.84 28.52 30.81 26.93 22.02 22.04 23.82 3.54 50.72 26.80 1.06 5.60 14.94 Note: Regional. MJ ERVIN & ASSOCIATES 98 .96 25.80 9.21 24. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.35 28.18 21.32 31.28 27.92 22.86 49.41 12.06 28.35 58.98 0.53 21.96 27.77 5.17 26.

995 $ 234.429 $ 238.502 $ (80) $ 60.658.208) $ (226.707 $ 260.478 4.557) $ 102.890.098. and consolidated outlet income these averages are based only on those markets with available data.638 2.089.129 $ 97.510 $ 60.780 $ 85.071.217 2.209 $ 26.956) $ 200.481 $ 96.855 $ 278.779 $ 121. these averages are based on all applicable study markets.626 $ 81.564 $ 252. Urban.011.604.241) $ (227.246 $ 118.875 $ 255.900 2.102 $ 223.622 $ 174.542.646) $ (98.367) $ (164.000 2.332) $ (238. Revenue.677 $ 180.223.900 $ 179.Sales.224 $ 189.263 $ 60.948 3.302 $ 69.295 $ 174. but for ancillary revenue.074 $ 131.934 3.289 981.911) $ (166.465.550 $ 177.993 $ 113.272 $ 210.526 $ 207.157.623 2.688 $ 85.716 Note: Regional.014.244 95 net retail Ancillary Revenue petroleum revenue $ 208.067 $ 92.144 2.023 $ (15. MJ ERVIN & ASSOCIATES 99 .000 $ 156.800 $ 225.852) $ 119.265.000) $ (241.467 $ 96. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.572) $ (286.866) $ (244. Outlet Costs.Table K: Study Market Data .630 3.394.544 $ 175.520 5.120 $ 54.837 $ 56.272 $ 118.746 $ (374.632 $ 256.550 694. outlet costs.250.772.279 $ 154.885. and All Study Markets are weighted (by market population) averages.143) $ (249.058.032 $ 77.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.694 3.209 $ 82.766) $ (274.719 3.648 3.640 4.098 $ (320.794 3.913 $ 139.004.066 3.805.247 4.197. For 95 net retail petroleum revenue.871) $ (128.117 $ 207.750 $ 271.966 3.827.010 1.856 3.095.135 $ 199.068 3.081 $ 222.013 $ 227.375) $ (49.542 $ 222.

00 11.85 15 11.315 710.41 1.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.827 3.55 19 11.605 16.870 120.91 17 4.60 3.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.50 3 10.76 18 5.275.145 81.51 9 11.98 7.10 3.06 16 4. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.394 2.54 6 2.20 17 14.658 3.Table L: Study Market Data .089 3.745 16.000 pop’n No.91 12. N refers to study sample size (total = 481).250 981 2.715 14.071 2.542.24 0.06 1 5.23 8 31.53 10 6.50 8.52 13 5.36 5.585 6.50 9.73 14. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.550 1.465 694 3.02 0.08 3.45 14.27 1.98 6.79 6.095 3.96 5.01 7 2.775. of Outlets No.30 1.89 7.84 12 5.43 12.88 12 7.29 8 7.223 3.06 5.20 0.845 15.17 19 9.97 8.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.38 0.475 3.88 11 8.89 2 4.60 11 7.058 1. MJ ERVIN & ASSOCIATES 100 .675 179.265 2.80 10 4.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.29 1.098 4.47 14 3.21 0.40 9 4. rank* 3.22 3. inverse ranking is used (lowest value = 1).604 3.45 0.790 1.04 15 4.975 2.48 7 7.22 0.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.73 5 10.28 17.90 13 4. of Brands No.08 16 3.157 2.33 0.014 5.47 7.004 3.775 678.40 1 3.08 4 2.13 2 11.310 1.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.970 330.180 616.30 0.42 5 14.400 74.68 4 7.41 0.27 0.95 3 9.23 6 7.Demographic Profiles Population pop’n 299 .

Senior Advisor. Principal Address: #400. Contact: Brendan Hawley. Contact: Cindy Christopher. They maintain a large database of historical prices at most major centres.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. and provide background resources to industry public affairs managers and the media. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Ottawa ON. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. The SCF is the basis for this study. Petroleum Products Address: 235 Queen Street.14th Street NW Calgary AB. health. generate jobs and growth. 119 . aviation and lubricants marketing channels. Ottawa ON. cardlock. Contact: Michael J. Ervin. Contact: Maureen Monaghan Address: 580 Booth Street. a series of studies whose goal is to strengthen Canada’s competitiveness.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. and in doing so. Vice President Public Affairs Address: 275 Slater Street. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Ottawa ON. accessible through a public fax-back dial-in system. safety and business issues. bulk. They work with major oil companies in benchmarking performance in the retail.

T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Executive Director Address: 214.Octane Magazine Octane is Canada’s refining and marketing trade journal. Managing Editor Address: Suite 2450. Supervisor.ab. no 45-004) is a useful source of supply and demand volume data. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. 101 . Contact: Robert Curran. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Its monthly publication “Refined Petroleum Products” (cat. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .6th Ave. Energy Section Address: Statistics Canada. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. 311 . It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Ottawa ON.6th Avenue. Contact: Len Bradley. Contact: Gerard O’Connor. SW Calgary. Octane is published quarterly. and is a useful “window” on this industry.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Calgary AB.

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